Opinion: Risk-share to beat supply chain issues

Laura Robinson

Brent Meyer

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Supply chain and inventory management issues continue to plague U.S. businesses.

Creighton University’s Mid-America Index, a monthly regional business survey of nine states including Missouri, noted in October that “supply chain disruptions remained the top risk for the final quarter of the year.” These challenges have been especially difficult for the construction industry. Skilled contractors are used to managing complex inventories and processes, but recent supply chain issues – and the associated challenges of input scarcity (including labor) and rampant inflation – have upended longstanding approaches to project delivery by complicating budgets and timelines.

Supply chain-related risk
There are some tactics available to both project owners and contractors to help them overcome supply chain-related risk. But while there is a wide variety of viable approaches to overcoming the supply chain challenge, one approach decidedly does not work: adopting a winner-take-all mentality that sticks one party with all the project risk.

In thinking through how to structure agreements to account for and share risk to the satisfaction of project owners and contractors, a few issues recur as sticking points that require careful thought and planning:

1. Early purchase and storage. This is an obvious remedy with some not-so-obvious risks. When essential materials and equipment are purchased and delivered on-site before they are needed, it removes some unpredictability but can create other challenges, such as project site efficiencies and the potential of theft and weather-caused damage. Not all projects have the capacity on-site to store necessary inputs, resulting in storage and transportation costs. These additional risks and challenges should be considered when determining if essential materials should be purchased early.
2. Contractors’ and suppliers’ input during design. Tighter coordination among design and build teams could alleviate the frustration of having designs for which necessary materials are scarce or unavailable. This could also lead project owners to consider integrated project delivery to get their projects across the finish line. This calls for owners to enter into one agreement with an integrated project team, allowing for the bulk order of necessary materials before the design phase concludes.
3. Equitable suspension/termination clauses. Project owners have had to deal with an absolute lack of necessary materials on projects since the supply chain challenges began. Getting in front of this possibility is necessary when drafting agreements. Ultimately, suspension and termination clauses are risk management tools, and as one would expect, they are being utilized more frequently in the current environment; however, the key to getting some measure of protection baked into contracts is the perception of each party that risks are being equitably allocated when project stoppages outside the control of the parties occur.
4. Unavoidable delay clause. Contracts can also contain language aimed at unavoidable delays, or force majeure, to deal with a stalled project where the contract has not been terminated. The central question in these circumstances is whether the delay is compensable or noncompensable. If the former, then what precisely will be compensable?

Across the finish line
Good faith efforts at negotiating equitable terms are usually rewarded with design and build partners who are incentivized to get things done to specification quickly and efficiently. Conversely, project owners who fail to consider risk-sharing mechanisms are simply limiting their options. Inflation and the scarcity of key inputs have dogged the construction industry for nearly two years; as a result, contractors and subcontractors have become skilled at managing these kinds of risk.

Intractable owners taking a project to market will find no bidders or bids that are multiples higher than anticipated. While supply chain dislocations could lessen in 2023, it seems unlikely that we will see pre-COVID-19 levels of efficiency any time soon. If you want to build in this market, all parties need to engage in creative risk-sharing mechanisms to get projects done.

Laura Robinson is a litigator in Husch Blackwell LLP’s Springfield office handling construction project disputes, and Brent Meyer is an Omaha-based partner with the firm in the real estate, development and construction team.
Robinson can be reached at laura.robinson@huschblackwell.com.