COVID-19 and the impact on the construction industry

COVID-19 and the impact on the construction industry

With pressure continuing to mount on the Government to stop all non-essential construction works, the Construction Industry Council has provided a suggested non-exhaustive list of critical construction-related activity that should continue in the interest of public safety.

Following the Government’s announcements earlier in the week, and advice from the Health Secretary that those who cannot do their jobs from home should go to work “to keep the country running”, the postion is that contractors should continue with the works until such time as they are unable or prevented from doing so.

This was echoed by the Housing Minister, Robert Jenrick, who tweeted: “Advice for the housing, construction & building maintenance industries: If you can work from home, do so. If you are working on site, you can continue to do so. But follow Public Health England guidance on social distancing.”

However, with work on Crossrail and other Transport for London (TfL) construction projects being suspended to help limit the spread of coronavirus, the next few weeks are likely to see an increase in the number of sites closing down and projects forced to be put on hold.

Taylor Wimpey announced that they will be closing all their sites “to help prevent the spread of Covid-19” amongst its workforce. We’re also finding that some contractors aren’t practically able to continue with their works and services as a result of a number of issues surrounding the coronavirus and subsequent Government advice and action, as a number of their staff can’t continue to work on site due to illness, childcare (following the Government’s announcement to close schools), self-isolation/shielding due to underlying health conditions and now the ability to obtain materials and building supplies.

Further, it’s not always possible for construction works to follow the advice of the UK Government and Public Health England in relation to social distancing when carrying out their works and services and as such they’re advising of potential delays due to force majeure.

During this difficult and unusual time, all parties on a construction project are bound to have concerns around their obligations. So, what should they be doing to protect themselves going forward?

What are a main contractor’s responsibilities?

In the absence of any instruction from the Government or Public Authority – meaning they can down tools and lock up their sites – many contractors are going to continue working and managing their workforce on site. The key issues before shutdown are going to be sourcing labour and goods whether domestically or from abroad.

Primarily, the contractor’s concerns lie with the security of the site and the progress of the works. This may involve having some difficult conversations about the potentially significant changes to the programme and what this means for the project.
At a time where finances are tight, main contractors need to be looking up and downstream to ensure that any payment processes are being taken care of. It is more important than ever to keep on top of any applications that have been made, ensuring that any necessary payment or pay less notices are issued, to minimise the risk of any ‘smash and grab’ adjudications coming their way.

Are there any clauses or provisions within their contracts that can be invoked to deal with delays arising from Covid-19?

With contracts, the devil is always in the detail, so it is important to scout out any clauses which may help in difficult times. For most employers and contractors, this means assessing whether the delay has arisen due to any factor which entitles the contractor to an extension of time to the date for completion of the works.

It is worth checking the contract for a ‘force majeure’ clause as this may excuse one or both contracting parties from temporarily performing their obligations. However, this will only apply if the disrupting event was beyond the reasonable control of the party relying on the clause at the time the contract was entered into. The wording of the provision is key, however, so must be carefully checked.

Sometimes, ‘epidemics’ or ‘civil emergencies’ are explicitly mentioned in force majeure provisions, but they can also be more general. If this is the case, then employers and contractors must assess whether the clause covers an event such as the coronavirus outbreak or any government restrictions it has triggered.

Parties should also keep in mind that – on the whole – a force majeure provision can only be invoked if the situation has entirely prevented them from performing contractual obligations (on a temporary basis), not just made them more difficult or costly to undertake. Should this be the case, relying on the clause could entitle the contractor to an extension of time, meaning they wouldn’t be penalised or have to pay an employer for each week’s delay on the completion of the project.

What happens if works are put on hold?

Contractors can be cautiously optimistic at this time, regarding their ability to recoup their loss of time. However, with any delay to a project, there are two aspects: the first relating to time (sometimes known as a Relevant Event) and the second, relating to loss and expense (sometimes known as a Relevant Matter).

Should a project be placed on hold due to force majeure or exercise by the Government or Public Authority of powers which affect the execution of the works, whilst the terms of the contract will need to be checked carefully, the contractor may only be entitled to an extension of time but not to loss and/or expense. This ensures that the risk of such events arising is split between the employer and the contractor, as the contractor isn’t liable for damages for delay, and the employer isn’t liable for the contractor’s additional costs.

Where contractors are looking to extend the time to complete a project, it’s essential that they put in valid notices, served in line with the terms of the contract, otherwise, they run the risk of losing their entitlement to an extension of time.

Where does the responsibility lie for payment support?

As explained briefly above, while force majeure or exercise by the Government or Public Authority of its powers, within the context of the contract may confirm the Relevant Event, entitling a contractor to an extension of time, the contractor won’t be compensated for loss and expense. As a consequence, main contractors may be in financial difficulty when having to swallow their own costs, unless they are able to recoup or defer costs through a claim on their own insurance policies or government funding packages.

In an ideal world, the contracts between employers and main contractors will work in parallel with main contractors and subcontractors. With so much uncertainty and a lack of labour and materials, subcontractors are also going to be looking up the chain for an extension of time – it is sensible for all parties to seek to adopt a consistent and reasonable in their approach to the issues delay bring.

Where all stakeholders are concerned, taking an overly aggressive or legal approach to a sensitive situation is unlikely to work. Maintaining an open channel of communication, both with the subcontractor supply chain and employer, is essential going forward.

Can an employer / main contractor terminate the contract?

If a construction site is shut for more than the agreed period in the contract and the project is on the road to nowhere, then (subject to what the terms of the contract actually say) it is possible if not likely that either party could serve a notice giving the other party notice to terminate the employment of the contractor. However, parties should err on the side of caution, as serving notice in this way often creates a hotbed of disputes around whether or not the party was in fact entitled to terminate.

Alternatively, a contract may be ended if it is said to be frustrated. Frustration occurs when there is a serious event, without the default of either party, once the contract has been entered into. This event would have to be something unexpected that renders the contract commercially or physically impossible to fulfil. If this is the case, both parties are discharged completely from fulfilling any further actions.

That being said, COVID-19 would be unlikely to fall in the category as generally it is more likely to be causing delay, rather than making the completion of a project impossible. We are set to see more guidance around this, however as more and more cases arise as a result of the current situation.

A word of caution for anyone considering entering into a contract – it is essential to take into account the risks associated with entering into a contract at such a turbulent time. While just weeks ago this epidemic arguably wasn’t reasonably foreseeable, it is now and may not be covered by the ‘force majeure’ clause in any new contracts, or provisions dealing with the exercise of powers by the Government or Public Authorities. Therefore, all parties should think twice before signing on the dotted line.

What are the next steps at this time?

Responsible contractors should be keeping an ear open – continuously monitoring government advice on what they can and can’t be doing. For example, if there is a lockdown on all construction sites, this must be adhered to or contractors may run the risk of fines and other penalties.

It is also essential for employers and contractors to dust off their contracts and, where anything isn’t immediately clear, seek professional advice. This can help them to get a handle on their current responsibilities – even a 10-minute call with an expert in the field can help to get some clarity around the next steps that should be taken.

What should contractors and subcontractors do to ensure they are in the best position going forward?

Aside from knowing their contract inside out, contractors and subcontractors must ensure they apply for any payments they are entitled to and ensure all notices for extensions of time are put in in a timely manner.

At a difficult and uncertain time for construction, parties throughout the supply chain should be keeping on top of processes and maintaining clear channels of communication, in order to safeguard the future of the industry.

Contact us

For more information about any of these issues, please contact Kate Onions or Alex Smith in our construction team.

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