Practical Law

The recent wave of major infrastructure projects in London has produced a number of collateral benefits. Key among these has been the opportunity it has afforded to leading clients to focus on the legacy impact of their projects for the industry as a whole. Enlightened leaders such as David Higgins and John Armitt (Olympic Delivery Authority), Terry Morgan (Crossrail) and Andy Mitchell (Thames Tideway) have used their influence and buying power to promote a range of initiatives within their supply chain, with a view to improving the sustainability of the construction sector in the longer term.

These initiatives have moved beyond purely environmental aspirations (“buying green”) to more social issues, such as promoting skills and training, diversity in the workplace, fair employment practices (wages and working conditions), community engagement, encouraging SME participation and so on. Establishing the Tunnelling and Underground Construction Academy in East London and adopting apprenticeship targets are examples of this trend. As key staff have moved from one project to the next (from the Olympics via Crossrail to Tideway and HS2) they have taken with them learning gained on earlier projects, which has then been developed and refined in the procurement process for later schemes.

Ethical sourcing

One specific aspect of the social agenda that is attracting an increasing level of interest is the ethical sourcing of labour and materials. The concept of “ethical sourcing” is derived from the Ethical Trading Initiative Base Code, which in turn is based on the UN’s International Labour Organisation standards. It focuses on the conditions under which materials are produced, particularly those sourced from developing economies. Aspects considered include whether:

• Forced or child labour has been used.
• Working conditions are safe, hygienic and free from inhumane treatment.
• Freedom of association and collective bargaining are allowed.
• Working hours are not excessive.
• Living wages are paid.

On recent major projects, contractual provisions have been included in the key contracts dealing with ethical sourcing. For example, Crossrail’s construction contracts included an obligation to comply with the provisions of the Base Code and to use reasonable endeavours to secure compliance by “sub-contractors and suppliers of any tier”. Similar provisions were included in the “works information” for the 2012 Olympic programme and the main tunnelling contracts on the Tideway project. Clients are also increasingly asking questions about ethical sourcing at the pre-qualification and tender stages and assessing the answers as part of their selection and evaluation criteria.

Practical challenges

This is all very laudable, but it gives rise to a number of challenges in practice:

• It is often by no means straightforward to determine the provenance of materials or how they are sourced, especially where they are procured deep within the supply chain. Relatively few materials come with an assurance that they have been sourced ethically and procured responsibly, and the BRE standard BES 6001 (Responsible Sourcing of Construction Products) provides no more than a governance framework for assessing that a company has appropriate systems in place. Clients such as Crossrail and Tideway have been forced to devise bespoke audit procedures in an endeavour to obtain this assurance.
• Even if it can be shown that a breach of ethical sourcing has occurred, in many cases there is no obvious sanction that can be applied. Requiring that the offending material is replaced with an ethically sourced one will often by neither feasible in practice, nor sustainable in the end. Termination may be seen as disproportionate, especially where the infraction occurs a long way down the supply chain. Further, proving loss to justify a damages claim may be impossible, especially where (as will often be the case) the unethical material is cheaper than an ethical one. The inevitable response of contractors to such provisions (to seek to pass the risk down the supply chain, often in inappropriate ways) tends only to exacerbate the problem, rather than resolve it.

Sticks and Carrots

In short, sticks do not generally work well in this area. Clients who wish to promote ethical sourcing need to think creatively about whether offering carrots might be a better way of achieving the desired result. Key performance measures and incentives linked to achieving ethical sourcing targets can be a more effective means of driving improvements than heavy-handed sanctions. Publishing league titles and highlighting best practice can also be a powerful tool, especially in an age when suppliers are under increasing pressure from shareholders and customers to demonstrate their ethical credentials.

Clients also need to engage openly with the supply chain, rather than simply imposing their own prescriptive standards. Crossrail formed a working group to address ethical sourcing in supply chains and were pleasantly surprised at the level of honesty and collaboration shown by their Tier 1 suppliers in helping to identify critical risks, pinpoint weak spots in the sourcing chain and define best practice in this area. The Crossrail legacy site sets out more details of the conclusions reached and lessons learned for future projects. For major programmes involving multiple contracts, a collective approach with shared incentives may prove to be the best way of catalysing the step changes that are needed.

Future Developments

Clearly this is still a developing area, but it is here to stay. The BRE is working with organisations such as Lendlease and HS2 to create a standard intended to help businesses re-engineer their processes in order to address risks associated with ethical labour issues in the supply chain. Guidance from CIRIA on the subject is also expected later in 2016. Meanwhile, the Modern Slavery Act 2015 has introduced specific requirements for businesses to publish the steps they are taking to avoid slavery and human trafficking within their supply chains, and specific legislation such as the EU Illegal Timber Regulation (995/2010) seek to impose specific requirements for materials seen as “high risk”. Just as importantly, peer pressure and client demands are likely to increase as the issue continues to climb towards the top of the industry’s agenda. Suppliers seeking to win work on major public sector projects will increasingly need to be able to demonstrate that they “get it” and have adopted processes and systems that will enable them to meet the ethical sourcing challenge.

Last word: balance

Having said all this, clients will in the end need to draw a balance between ethical sourcing and value for money. They cannot ignore either, but equally they cannot afford to focus on one to the exclusion of the other. In an age of continuing austerity, public authorities cannot be seen to waste taxpayers’ money in pursuing “gold plated” solutions or mounting social crusades, without regard to the cost involved. Equally, an increasing focus on ethical conduct in business is now a fact of life. Suppliers who can help clients resolve this dilemma will be well placed to sustain their own businesses going forward.