13/10/2022
Welcome to the October 2022 edition of Higher Education Today, looking at current topics and questions facing higher education.
In each edition we feature content from key members of our Higher Education legal and regulatory team. If you would like further details about these individuals or information about the wider Higher Education team, please see our Higher Education brochure.
We are delighted that since our last edition in July our Higher Education team has been ranked in the Legal 500 and has been nominated as a finalist at the Education Investor Awards 2022 in the “Legal Advisor – to Education Institutions” category.
We hope you find the newsletter interesting and helpful.
Virginia and Ashley
Joint Department Heads for Higher Education
(Avoiding) Getting Higher: Managing Inflation in Higher Education Construction Contracts
Recently inflation is having a detrimental effect on the construction industry. External global factors, such as Brexit, Covid-19 and the Ukrainian war are impacting construction projects by curtailing the supply of goods and materials and increasing prices. As a result, we are seeing higher costs in materials and labour pushing up tender price inflation, investor uncertainty resulting in tighter financial conditions and a national shortage of skilled construction workers.
These factors have created considerable uncertainty over completion dates and increased difficulty in estimating future costs. Most contractors already operate on slim margins, therefore increased costs are impacting the bidding process. If contractors do not increase their fees, they will have to absorb the increased cost resulting in slimmer margins and an increased risk of liquidity.
Given the construction industry’s widespread activity across the Higher Education sector this uncertainty and cost inflation is likely to impact Higher Education Institutions that have live or planned construction projects in their pipeline. Whilst the inflation impact cannot be controlled, there are some options which may help mitigate the effects of inflation for universities when drafting construction contracts.
Provisional sums
These can be included in construction contracts to tackle the price increases. They are included in the contract specifications and are an estimate of the likely cost of works that either cannot be sufficiently defined at the time of contracting or works that a university (as the employer) may choose not to undertake, e.g., NEC Option A. They can be drafted very precisely to achieve exactly what the parties require. Consideration to be given to their value when entering the contract; any contingency in budgets to allow for increases to provisional sums and any approvals needed from funders; the method for instructing or allowing a change to provisional sums and their impact on the programme.
Fluctuation provisions
Contracts can be drafted to include these clauses. They are compensatory clauses that allow the contract price to be adjusted to reflect changes in the cost of materials or labour during the contract period, e.g., JCT, NEC Secondary Option X1. The benefit of a fluctuation provision is that drafting can be tailored for the circumstances. This does not mean limitless University cost exposure or unrestricted contractor recovery. The University is not adopting much more risk than it would have already taken under a lump-sum contract, and it attracts more economically priced tenders. The contractor, on the other hand, is no longer required to price for an uncertain future risk.
Cost Plus/Target Cost Contracts
Cost Plus is where the contractor is reimbursed for the actual costs incurred for plant, materials, labour, plus an additional fee for its overhead and profit, e.g. NEC Option E, JCT Prime Cost, FIDIC Short Form.
Target Cost is a mechanism written into the contract which gives the contractor increased profits if the work is provided cheaper whilst penalising the contractor for going over budget e.g., NEC Options C&D, IChemE Burgundy Book.
Bespoke drafting
Tailoring a clause to specifically suit the parties’ requirements e.g., dealing with the price increase in steel as a Relevant Matter (JCT).
Security
Given the increased possibility of contractors going into liquidation which poses particular risks for universities, consideration should be given to additional security to negate such risks, e.g., performance bonds, parent company guarantees and vesting certificates.
If you would like more information about Higher Education construction contracts or to discuss construction matters in higher education more generally, please contact Legal Director Niamh Batterton.
Getting Greener: Green Leases and the Higher Education Sector
With an ever growing number of universities making new commitments to reach net-zero emissions by 2050 or, in some cases much earlier, many Higher Education Institutions are starting to face external and internal scrutiny as to exactly how they will achieve these targets. Beyond the obvious headline methods to reduce carbon emissions such as decreasing dependency on gas boilers, one comparatively quick and (relatively) painless green win for universities is through its property lease arrangements, either as landlord or as tenant.
The concept of “Green Leases” – where landlord and tenant lease arrangements include “green” obligations on both parties - was originally pioneered in Australia. However, to date, it has achieved relatively little traction here in the UK (both in the Higher Education sector and more generally) as many large private sector landlords have been reluctant to embrace wide ranging changes to their standard commercial leases in order to include specific green obligations, on the basis that “if it ain’t broke, don’t fix it”.
It is encouraging that this situation may at last be about to change. Public sector bodies such as NHS trusts are now encouraged to use standard template Green Lease documentation when negotiating new lease arrangements with occupiers on NHS land. In doing so, NHS sustainability managers can demonstrate sustainability commitments through their lease negotiations. We are also seeing a growing interest from Higher Education Institutions in Green Leases – which is perhaps no surprise as the Green agenda and sustainability is very much front and centre of many University strategies.
It’s important to be aware that there is no “one size fits all” Green Lease. Green Leases can include as many (or as few) specifically green obligations as the landlord and tenant wish, whilst recognising that individual circumstances (and appetite for change) may differ. For example, a “Light Green Lease” may state that the sustainability obligations are not intended to be legally binding, or it may avoid inclusion of obligations which have an adverse costs impact on the parties. On the other hand, a “Dark Green Lease” could include a range of legally binding obligations such as restrictions on alterations works which have an adverse impact on energy performance rating, obligations on the tenant to comply with the landlord’s sustainability policies, and/ or obligations to implement an environmental management plan for the building. There are many different options available, and each University will need to assess which obligations they want to include.
If you would like more information about Green Leases or to discuss property matters in higher education more generally, please contact Partner Mark Paget Skelin.
Say Hello to Us
Our Higher Education team is attending and speaking at a number of in-person and online events over the next few months, please follow the link for details. If you are also at these events, please come and say hello to us.
Independent Higher Education Conference, 18 October, London
- Virginia Cooper and Rachel Soundy attending
EducationInvestor Awards, 8 November, London
- Rachel Soundy and David Moore attending
University & Healthcare Estates & Innovation Conference, 15 November, Birmingham
- Mark Paget Skelin and Rebecca Pendlebury attending
University Property Development Conference, 23 November, London
- Niamh Batterton attending
If you would like to discuss any of these topics in more detail, or to find out how we can help your organisation, please contact our Higher Education team.
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