Blackstone Waterhouse
19 March 2020
COVID-19 WILL IMPACT EVERYTHING ACROSS THE PROJECT LIFECYCLE
1. The Corona Virus pandemic will have major impacts across the major projects spectrum in Australia for the short, medium and long term.
2. Blackstone Waterhouse has prepared some risk management strategies for:
a) managing risks in current projects (now, in the medium and long term); and
b) limiting risks in new projects having regard to the likely impact on all project participants across the finance, planning, supply, construction and delivery phases of a project.
3. Blackstone Waterhouse will continue to operate during this pandemic. We are committed to working with our clients from developers, head contractors, financiers, suppliers, engineers and subcontractors through this difficult period.
4. Australia is well placed to combat this pandemic – our message is keep calm and carry on.
WHAT IS COVID-19?
5. COVID-19 is an infectious disease belonging to the Coronavirus family of viruses, which, following its outbreak in Wuhan, China, has spread globally. As of 12 March 2020, the World Health Organisation (WHO) has declared COVID-19 a “pandemic”, with the majority of reported cases in China, Italy, Iran, South Korea and Spain.
6. As at the date of this article, over 500 people in Australia have been confirmed with the virus.
IMPACT ON CURRENT PROJECTS
7. Firstly and of critical importance, stay updated as to Government directives as to OHS and other restrictions on movement of people and access to sites.
8. There are numerous obvious impacts which will affect almost all projects:
a) procurement delays for building products (especially from China and Europe)
b) increase in material costs given:
i. shortages arising from reduced global production;
ii. historical low for the Australian dollar;
iii. labour shortages locally (with staff unwilling to attend site and increasing Union issues);
iv. increased use of domestic resources (which are more expensive than imports);
c) increasing in labour costs and less use of imported processed and/or pre-fabricated products;
d) varied site hours and access issues;
e) resequencing of works to accommodate above issues;
f) acceleration of works to address above issues;
g) subcontractor and supplier insolvency;
h) exposure to LDs;
i) claims for delay costs and extensions of time (EOTs);
j) increased bank/financier scrutiny of progress claims and costs to complete.
9. For many clients, a number of these issues will simply result in increased project costs – impacting very narrow margins in what is already a challenging market.
10. We have assisted a number of developers and contractors by providing a ‘pandemic risk’ contract review to identify:
a) ability of parties to seek upstream or downstream EOTs arising from COVID-19 (this turns on whether the provisions in a contract for EOTs permits this – and careful attention to notices and other requirements is critical to such claims) – same goes for Liquidated Damages and/or Delay Costs;
b) ability to claim on business interruption or other project insurances in respect of COVID-19;
c) scope of ‘force majeure’ clauses in respect of the above claims;
d) scope of clauses relating to ‘frustration’ arising from same;
e) termination rights (including termination for convenience);
f) suspension rights;
g) ability to claim on contingency amounts or provisional sums under finance agreements;
h) ability to claim against government initiatives to address COVID-19.
11. As we saw in the global financial crisis, ultimately, a relational approach is preferred to a strictly legalistic approach to the management of such issues. Financiers will be called upon to assist carrying projects and developers to completion (as will head contractors be called on to carry subcontractors).
LIMITING RISKS IN NEW PROJECTS
12. In addition to the above risks, many practical steps can be taken to mitigate risks in new projects including:
For all project participants
a) adopting more relational models of contracting and allowing contingency for COVID-19 as a provisional sum and additional float in programs;
b) negotiating finance which accommodates this;
c) obtaining insurance with a broad ‘force majeure’ provision extending to COVID-19;
For Developers
d) expect planning and financing to be harder and more protracted;
e) in addition to the above, understanding the scope of EOT provisions and giving consideration, for example, to a risk share arrangement for COVID related delays (for example a fixed number of days being the Developer’s risk for COVID related delay then passing to the Head Contractor);
f) obtaining facility arrangements which accommodate these risks and a contingency in funding specifically for this;
g) understanding the impact of acceleration and re-sequencing directions and fixing a rate for Delay Costs (against with a risk share for the head contractor);
h) consideration of additional ‘key personnel’ insurance products in addition to business interruption and other cover;
i) providing relief in the short term from LDs and adjusted ‘bonus’ amounts for adjusted dates for practical completion – subject to agreement with financiers – to ensure contractors remain committed to projects impacted by COVID-19;
j) scrutinise selection of subcontractors – cheapest may sound good but may not survive;
k) rise/fall clauses and currency hedges (particularly for larger and cross-border projects);
l) be aware of the risk of payment claims – particularly where sites are unattended – amend notice provisions to be electronic to mitigate against such risk;
For Head Contractors and Subcontractors
m) the same considerations downstream, careful attention to each of the above clauses;
n) consider the impact of delay, acceleration, disruption and re-sequencing – and whether each should be separately quantified at fixed rates;
o) consider site access delays and interface issues;
p) be aware of Union risks in light of COVID-19 and increased activism;
q) manage quality carefully – some of the worst defects in building projects occurred during the last GFC; and
r) price for these risks – allow float for this risk and additional provisional sums for what will involve increased procurement and labour costs.
Way forward
Blackstone Waterhouse supports all industry participants in managing projects through this pandemic.
In addition to construction contracts, contract administration and claims and dispute resolution, we can assist with planning, finance and property issues all of which are likely to be impacted by COVID-19.
The Australian construction industry is in for a difficult ride in 2020 – following fires and floods, the pandemic is going to see a rise in subcontractor insolvency and distressed projects.
Keep calm and carry on – as with the global financial crisis, in a perfect world, this is a time for a relational approach to contracting. Against this, particularly where projects are distressed or involve government, this is a time for all project participants to understand their strict contractual obligations to issue notices or otherwise compromise the extent to which they can avoid the impact of this pandemic.
Blackstone Waterhouse will remain in operation (including by remote access) throughout this period. We will prevail.
Danny Arraj, Managing Partner, Real Estate & Development
Andrew Elias, Graduate Lawyer, Construction & Infrastructure
Andrew Zeidan, Lawyer, Real Estate & Development