Construction Columns: Five legal and non-legal tools to increase the chance of a successful hotel project

What increases the chance of a project failing?

Research has shown that some of the main recurring causes of project failure are:

• pricing and programmes which are too optimistic and do not account for risks, perhaps in order to be more competitive;
• inadequate preparation, by either the developer or contractor (or both parties); and
• communication issues - on expectations, allocation of tasks, sharing of information etc.

Readers may be surprised to see that technical difficulties, planning challenges and surprises in the existing building/on site are also mentioned in the surveys and research but do not feature as the most common causes for project failure.

Of course there are many more tools to consider and implement on a project than the five listed below and, depending on the specifics of a project, some options may be more appropriate to apply than others. In some cases, clients prefer a more traditional, adversarial form of contract where risk is contractually passed to the other party to manage. However, these are the tools that we often apply/see being applied successfully on a range of complex projects where the main priority is working together to complete a successful development.

1. Enable flexibility in a contract

Unforeseen events aren't just the ones listed above, but may also include neutral or positive occurrences such as the availability of new innovations which could impact on the development. Whatever the nature of those surprises, the contract needs to provide the flexibility for the parties to deal with them. For example, the contract might explicitly set out legal and project management arrangements to deal with specific anticipated developments, or it can be drafted to allow for a more generic flexibility to deal with unforeseen events. Our March 2022 Construction Column on innovative and collaborative building contracts explores this topic in more detail.

2. Involve the contractor and key subcontractors/supply chain from the design phase of the project

Hotel projects often require numerus suppliers and subcontractors who are able to provide specialist services or skills that the main contractor does not have. Tapping into the resource that such supply chain parties provide is too often overlooked, but they can bring key opportunities and solutions to the table. They can also help populate risk files and contribute to risk mitigation processes.

Issues in the supply chain can also creep up to the main contract and it is normally better to resolve them as early as possible. Taking a pro-active approach as the developer to identify and help deal with such issues (even if they have not yet impacted the legal relationship between the developer and the main contractor) can benefit the project and hence the interests of the developer.

To enable good supply chain management, aligning the main construction contract with the subcontracts/supply contracts can be beneficial to the overall project.

3. Stimulate sharing of information and early warning

Communication is key: too often parties assume the other party is aware of a certain piece of information, or should be aware of it, or does not need to be aware of it. Depending on the project, the parties might seek to adopt a different approach: including an obligation to share all information unless there is a reason why this should not be done. When a problem arises, we regularly hear: “If only we had been informed earlier” – which suggests that the issue might have been avoided with earlier communication.

It can also be important for a party to give a warning to the other – not just if it is certain that a problem will arise, but also if there is a risk that it might. This will enable the other party to make decisions that might mitigate any risk, to document the current situation or to take other measures. If one party believes that it might not be able to meet its contractual obligations, then warning the other side of this may be the catalyst for both parties to work to find solutions rather than be the prelude to legal proceedings. Ultimately neither party benefits from a failed project and neither party benefits from a dispute. Attempting to limit the effect of an issue at an early stage can decrease both the impact of the problem and the chance of a dispute.

4. Allow for a fair price to be made by the contractor and suppliers

Each party has its own interests when working on a project. We already mentioned a main goal of the developer. A primary goal of the contractor is to generate both revenue and profit (in addition to creating an impressive track record to win new work).

Aiming for a fair price may mean that a different way of pricing is required. A typical approach is to agree on a fixed lump sum contract sum at the point of signing the construction contract. This is often a requirement for internal approval by investment/CAPEX departments. However, if the contractor has not yet been able to gather all information required to come to sensible pricing at that point, it might mean that it has agreed to an amount that is actually too low which will inevitably lead to issues throughout the programme. Another outcome is that the price may be higher than is actually appropriate for the project and the client ends up paying more than they should, as the contractor felt compelled to take related risks into account when determining pricing.

Sometimes it can make more sense to consider other forms of pricing. Some forms we regularly see are:

• initial pricing that is to be reconfirmed/adjusted once more information is made available / once the design is settled;
• partially fixed pricing, combined with a cost reimbursable approach on an open book basis (subject to, for instance, a 'not to exceed' budget) for parts of a project;
• profit sharing of budget savings;
• budgets for individual risks (whereby surplus is shared);
• broad and/or very specific compensation events; and
• bonuses for early completion.

5. Investing in a good relationship over multiple projects

Parties litigate for a reason. Almost all parties favour settling over pursuing a dispute. One reason parties decide to litigate is because they are faced with significant losses they cannot recoup. Depending on the project, whether there is a pipeline of work to be had and the extent of losses, it may be possible to frame such losses as an investment if it results in an improved working relationship between the parties. This specifically relates to losses that are caused by miscommunication, inefficiencies and other examples of not yet knowing how the other party works. Once both parties have gone through the motions, they have learned how the other party works, know each other better, and are able to work more effectively the next time around. Knowing that there is more work in future often means parties are more amenable to investing time, energy – and potentially money - in their relationship (which by itself can also prevent further issues from occurring).

We hope these five legal and non-legal tools help parties to building projects achieve a successful project.