Where is the industry in a post-pandemic pre-recession world?
Russell Myers BSc(Hons) MBA PGDip Law MCInstCES MCIArb, Director, Agincourt Group
COVID-19 has had a profound impact on the construction industry that will be felt for many years to come. Projects and frameworks have experienced delay, lost productivity, increased costs and lost profits. For the industry and businesses to mitigate the impact of these risks it is essential that all parties across the whole supply chain implement proactive strategies that identify and manage contractual and commercial impacts. Contractors and those in the wider supply chain may experience numerous issues due to the pandemic, however, the following examples are more likely in a post-COVID world than others.
Force majeure
During the early stages of the pandemic, force majeure claims were throughout the construction industry. While many of these have had merit were issued carelessly and without sufficient consideration of how the pandemic actually prevented performance of specific contractual obligations. Little consideration had been given to the disruptive costs associated with the force majeure event and associated delay to completion, however, it has proved essential that contractors (particularly under NEC) are in a position to adequately prove the delay and disruption and also to demonstrate the mitigation measures that they have undertaken to avoid further impacts on the time for completion or delivery.
Delay claims
In connection with force majeure claims or other delay and disruption claims, there can be supply chain interruptions, staff and consultant absences and other issues that cause significant delays. Often these are already categorised as contractors risk events, however, the test of reasonableness comes in to play when, for example, the contractor could not have reasonably expected that their specialist materials supplier would go bust, due to the impacts of COVID. Thus delaying the completion of a critical part of a project.
Disruption (or productivity) claims
In connection with force majeure claims or other delay and disruption claims, there can be supply chain interruptions, staff and consultant absences and other issues that cause significant delays. The pandemic is expected to reduce productivity, at least in the short-term whilst we all adjust to the new normal, this is measured as the amount of (workforce) input required to achieve a specific output. For example, a civils contractor building a slab base under a lump-sum contract may have assumed, pre-COVID, that it will take six operatives eight hours per day to lay the concrete and rebar in each base slab. However, personal protective equipment (PPE) and social distancing requirements now mean that this same work takes ten hours per day, forcing this contractor to incur additional costs.
Additional material costs
An example of this could be the contractor intending to procure certain materials internationally, but, being forced to procure those same materials from a more expensive domestic source.
Insolvency issues
Unfortunately, some owners, contractors and suppliers may not and have not survived the pandemic.
HSE and staff
Construction teams have rightly expressed safety concerns relating to their ability to work safely during the pandemic. These issues may cause delay and disruption. In addition to this, there is a legal and moral obligation for contractors and the supply chain to keep their workers safe.
Almost all parties on any construction project will have concerns regarding the impact of the pandemic. To help manage claims and address issues when they arise, it is important to have clear and transparent discussions.
While the impact of the pandemic and claims associated with it claims will largely depend on the risk allocation under the applicable contract, below are some key considerations.
Clear lines of communication
Almost all parties on any construction project will have concerns regarding the impact of the pandemic. To help manage claims and address issues when they arise, it is important to have clear and transparent discussions with respect to the impact of the pandemic and the potential contractual ramifications.
Review and comply with notice requirements
Clients, employers and contractors need to identify any applicable contractual provisions, as a failure to comply may result in a loss of entitlement to an otherwise valid claim. In addition to notice provisions related to compensation events or variations, most contracts also contain stringent notice requirements with respect to the start and end of the alleged force majeure period.
Cost and time
It is nigh on impossible to monitor the financial health of your supply chain, particularly if they are not listed, however, there are often warning signs that they may be experiencing difficulties.
While many standard form contracts do not entitle the claimant to claim additional compensation for a valid force majeure claim, others do and if the pandemic is impacting your ability to perform in accordance with the contract, it is important to undertake a comprehensive contractual review to see if you are entitled to either or both.
Updated programme and mitigation
It is important that:
- Pre-COVID programmes should be updated to reflect the measurable impacts of the pandemic.
- All steps being taken to mitigate and overcome delays are documented; you have a duty to mitigate.
- Owners ensure they are receiving and reviewing such documentation, which will allow them to assess the contractor’s performance, costs, and potential impacts of the pandemic. Contractors keep records if they are looking to obtain time and/or cost relief.
- And just in case you missed the last point – keep accurate records.
Proactive change/claim management
There is a natural tendency on many projects to focus on completion of the work, leaving the resolution of claims to the end of the project. This approach often results in larger claims, more legal involvement, and often fewer positive outcomes. Under the NEC claims are dealt with on the hoof and long shall it stay this way, however, if you are working to another standard or bespoke contract it is important that claims are raised immediately to enable a fresh approach and review.
Understand project (commercial) security
There is a natural tendency on many projects to focus on completion of the work, leaving the resolution of claims to the end of the project.Most large construction contracts require some form of project security, with the most common being performance bonds, collateral warranties and retention bonds, all of which include stringent notice and other technical requirements. A failure to comply with these bonds, may result in the loss of an important available remedy should the worst happen.
Supply chain insolvency
It is nigh on impossible to monitor the financial health of your supply chain, particularly if they are not listed, however, there are often warning signs that they may be experiencing difficulties. For example, a sudden change in invoicing practices (e.g., more aggressive), deteriorating performance, loss of key personnel, regular credit searches, and keeping ones ear to the ground, will also inform you regarding financial health.
External support
Most contracting parties do not have the internal resources that are required to deal with the complex and wide-ranging matters that arise from the impact of COVID, in fact, it is usually left to the QS team to muddle through. To avoid this, early engagement of external support should be a priority, be it claims consultants, expert advisors or lawyers it is a fact that the swifter the engagement then the better the final result.
Conclusion
It is clear that COVID has had a wide-ranging, and potentially long-lasting, impact on the construction industry in the UK and wider world. It is also clear that businesses who plan, communicate and understand their obligations regarding mitigation and legislation will be better placed to not only suffer the impacts of COVID, but potentially seek to capitalise from the opportunities presented by the ‘new normal’.
Russell Myers BSc(Hons) MBA PGDip Law MCInstCES MCIArb, Director, Agincourt Group