COVID-19 and Construction Risks
With the current uncertainty surrounding Covid-19 we consider below some of the risks to construction, particularly what any restriction of movement of materials, sub-contracting supply chains and labour may have on the projects you are funding.
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Firstly it’s now probable that most construction contracts will be affected to a greater or lesser degree and that the corresponding disruption will have cost / time implications that Contractors’ may well try to recover under the force majeure (FM) provisions within Build Contracts. Delays and costs that are successfully justified by contractors will inevitably effect the developer and may well lead to breaches of conditions within your funding agreements.
Each contract will have its own nuances and wording that will need to be checked but generally for a claim predicated upon FM the following three tests will need to be satisfied, please note this could apply to building contracts, material supply contracts and potentially your funding agreements:
- First, there must be no reasonable way of completing the works on time (simply stating it would have cost significantly more to complete the works would not satisfy this test).
- Secondly, any FM event must be an event that neither party could prevent by using reasonable measures.
- Finally, the event must be one that could not have reasonably been foreseen, by someone experienced and competent.
It remains to be seen how the tests are applied but if the situation escalates we can foresee the three tests above being met, so what sensibly should now be done by Developers and Sponsors in this regard:
- Any new contract being entered into should be drafted with the current situation in mind.
- Review relevant contract clauses and establish the exact FM position, and arrive at a consensus with the parties on process moving forwards.
- Review insurances, Bonds etc. to ensure necessary protections will be afforded to the parties.
- Ensure adequate systems are in place to record delays / costs.
- Ensure all relevant notices are correctly and timeously issued.
- Establish what effect delays would have on the facility and agree approach going forward.
The effects arising from delays to labour and materials could be manifold and potentially sites may ultimately close for a period of time, in this regard it would be prudent to consider the following and seek clarification with Developers / Sponsors as to their contingency plans upon the below:’
- Loss of site security personnel leading to potential theft, damage / vandalism to site.
- Insolvency of companies in the supply chain, establishing how robust the supply chain is.
- Works left unfinished may suffer damage from weather etc., ensure adequate protection can be provided.
- Work left incomplete for a period may affect warrantees / product guarantees.
- Additional start up and shut down costs should be factored into any discussions.
- Potential delays in re engaging the supply chain and the effect on programme, the overall delay is unlikely to be limited to the time of any associated down time and there may well be additional costs to factor in.
- Missed manufacturing slots leading to delays of materials, particularly materials from countries whose borders are closed to the UK. Establish the weaknesses in supply and reschedule labour accordingly.
- Performance Bond issues, check the small print.
- Additional professional fees may become relevant and should be factored into any discussions.
The above is clearly not exhaustive and each project will have its own characteristics. Should you have any questions arising from the above, or would like Paragon to undertake a review please don’t hesitate to contact us on the email address below.
Robert Kendall: firstname.lastname@example.org