Investors remain cautious amid supply chain challenges and ongoing concerns around risk allocation
While the construction market remains strong across Canada, investors are exercising caution due to pressure and market fluctuations caused by inflation and high interest rates. Like many industries, the infrastructure market also suffers from supply chain challenges and volatility in the post-pandemic era.
“The construction industry is very buoyant,” says Andrew Wallace, general counsel at Alberta-based PCL Construction Inc. “I don’t think there is a location in Canada that you would describe as slow.”
However, inflation is putting tremendous pressure on the industry as construction companies struggle to meet the budgets of their private clients while also managing risk and finding solutions to enable projects to go ahead in the current volatile landscape.
“The biggest challenge right now is how to manage overall escalation and volatility risk, either on the public side or on the private side,” says Wallace. In addition to the impacts of the pandemic, Wallace cites factors including the floods in BC that disrupted transportation networks, global shipping demand problems, and the supply chain network, all of which created an environment of volatility.
“We are really looking at our industry through the lens of volatility that we’ve experienced over the past few years and trying to create the most appropriate model to suit the client’s needs, cost-wise and risk transfer-wise,” says Wallace.
A wide variety of contract models have emerged, offering alternatives to the traditional public-private partnership model, which presents further challenges for contractors.
“Now we are seeing some projects done by different models; more collaborative models using contract and pricing strategies, so there is less emphasis on fixed price,” says Marianne Smith, a partner at Blake, Cassels & Graydon LLP. “This has made it really challenging because a number of these models are in a test or pilot phase.” These new models lack the mature contract templates of the P3 model, and risk allocation is often a cause for concern, Smith adds.
Finding the ideal risk-sharing model is a significant issue for construction companies. At PCL, Wallace and his team have public and private clients prepared to have meaningful conversations about risk transfer. He says that when such discussions do not occur, the project may fail as costs may exceed the available budget.
“Not to say that all risk should be pushed away from contractors because, in some cases, contractors are the best parties to manage a particular risk, but that question needs to be asked on a case-by-case basis,” says Wallace.
PCL’s legal department assists the teams with existing projects and administering current contract models, and also helps with new pursuits.
“Presumably, we’re getting smarter as we continue to manage these volatile periods by trying to tweak models to find the best risk allocation that suits our clients, subcontrators and supply chains,” says Wallace.
Supply chain challenges and economic restraints continue to disrupt the industry in the aftermath of the pandemic. Chris Moran, general counsel at Maple Reinders Group, is watching project development with caution as he is concerned about the impact of supply chain constraints.
“We are concerned with projects being cancelled or pushed back as well as potentially some of our subtrade partners having economic restraints or issues that might cause us problems with the operation,” says Moran.
Vernita Tsang, general counsel and chief compliance officer at Fengate Asset Management – an investor in infrastructure assets – notes that in the fundraising space, attracting global investors is a growing challenge.
“We’re seeing infrastructure investors hesitant to commit new funds in this current market,” says Tsang.
The rise of ESG is top of mind for the legal department at Fengate as it aims to develop and implement a robust five-year plan.
“To attract international capital – particularly European – having an ESG strategy and committing to and abiding by certain international standards of ESG with reporting, tracking and monitoring is just table stakes now,” says Tsang.
Smith focuses on protecting the integrity of public procurement processes for her public sector clients and supporting them to deliver their projects as quickly as possible. She hopes to see continued investment in public infrastructure and legislative regimes that encourage further development.
“Anything that makes approval processes or other regulatory processes more efficient in the infrastructure space is positive for everyone, including the public sector entities trying to get their projects built,” says Smith. She notes that the pandemic also highlighted the importance of force majeure clauses in contracts, so clients are taking greater care to ensure they are protected from events outside their control.
Tsang would like to see governments take more of a leadership role in solving the infrastructure deficit in northern and remote Canada and stimulating expansion in those areas.
Wallace is optimistic about the future of Canada’s construction industry as the country’s open immigration policy continues to fuel economic growth. He predicts that the green energy transition will create many opportunities for the construction industry as we transform how we generate and use energy, live and work, and rely on transportation networks.