How will delays to my project caused by COVID-19 impact costs? Who will pay for the delays?
Main contractors are facing commercial pressures, due to the increased costs associated with social distancing compliance. Things like enhanced cleaning regimes and temperature testing, stretch preliminary costs for longer working days and programmes get prolonged by reduced output. Depending on the form of contract, some are finding relief but particularly under JCT contracts, this is for time and not loss and expense.
COVID-19 will lead to a huge increase in time-related claims in the coming months and early action in assessing their value will determine their success. Prompt examination of delays, including analyses of associated costs and apportionment of risk, will significantly help safeguard your interests.
As commercial pressures mount, a more adversarial model is expected. This may include contractors attempting to pin delays down to events, other than Force Majeure, which would allow costs to be reclaimed.
We advise to work closely with the design team to understand any risks to completing the works, so for example any potential material delays or implications of social distancing compliance should be considered with the contractor.
Be aware that a number of contractors are attempting to introduce COVID-19 clauses into contract amendments, some at the eleventh hour. A good practice is to ask the solicitor to propose an amendment rather than waiting for the contractor to do so. Contractors concerns will be related to safeguarding against material price increases from overseas, but others are more far-reaching than this due to concerns about a second wave and further restrictions. Many are seeking to clarify the position with Force Majeure – particularly now that COVID-19 is a known issue.
When tenders are returned, check the length of validity of quotes as some tenders are being seen with validity down to no more than 60 days due to a fear of price changes and volatility in the market.
I’m concerned about the financial viability of contractors and sub-contractors in the current climate – what do we need to think about?
Contractors are facing increased costs due to factors mentioned above, tender opportunities are also reducing in some sectors which will lead to increased competition for work. You should be aware of contractors “buying” work for the pipeline.
With the competing factors of labour costs, materials availability, productivity, reduced number of opportunities; greater spread of tender sums are expected.
Project teams should consider the aspirations for the project and consider risk allocation – lowest price often does not lead to best quality and contractors may take an adversarial approach during the post-contract period to make up for low pricing.
You should be undertaking financial checks when entering into a contract (e.g checking company accounts, Dun and Bradstreet reports etc.) However, it is important to note that these are at a point in time and do not always flag up issues. You should also ask contractors about their pipeline of work and capacity – it is worth checking whether these projects are in sectors that they are known for or if they are moving into new sectors to find work as this may be risky if they don’t have relevant experience.
The Corporate Insolvency and Governance Bill was recently passed and is intended to maximise businesses’ chances of survival and will affect existing contracts. JCT and NEC have provisions to terminate a contract based upon insolvency and these existing rights will be severely limited. This may lead to earlier termination if there are other reasons in addition to insolvency.
How can I de-risk my project?
- Work closely with the rest of the design team and think about what is reasonable to expect the contractor to price, making it attractive as possible to them.
- Surveys – ensure all surveys relevant to the project have been undertaken so that any issues can be included in the tender documents – e.g. asbestos removal.
- Detailed coordinated design – ensuring that all disciplines are coordinated and that all particular project requirements have been considered.
- Appropriate risk allocation – considering all risks on the project and thinking about what is allocated to the contractor and if they are best placed to hold that risk, bearing in mind that they will price for taking it on.
- The correct route to procurement - Most contractors are still open to tender opportunities but are being selective about what they pursue due to the staff being furloughed, which is affecting their ability to resource tender opportunities adequately. Some respondents to our survey have reported unattractive procurement routes, e.g single-stage Design and Build with a large project value and/or excessive numbers on the tender list, and concerns about the viability of the schemes going ahead as other reasons why they have declined to tender.
- Use of real-time data and digital management of information is more important than ever, slowed project programme timing can be supported by digital management, helping to accelerate the pace of project delivery as well as saving time through pre-planning and giving clients confidence.
What is your latest assessment of the impact of inflation?
Generally, for the next twelve months, it is anticipated that inflation will be static with inflationary and deflationary pressures neutralising on the basis of a continued return to some kind of normality. There may be some ‘spikes’ of inflation depending on location and availability of labour and materials so it is important to assess inflation for each project, considering the local market and risk profile. There are then hopes of a bounceback in 2021 and 2022 if the economy can avoid a prolonged recession.
Inflation in the longer-term is dependent on a number of factors and combinations of these, including whether there is a second wave in the winter causing lockdown to be reinstated, whether a vaccine is found, how quickly and if the economy recovers and whether there is a no-deal Brexit.
For further information see our Summer 2020 market report, A New Landscape.