While the UK Government has published guidance on how the construction industry should continue during the pandemic, there was a period between the country going into lockdown, the confusion about how to implement social distancing guidelines, and other new working methods before the guidance was published. Notwithstanding this, there were the measures to be adopted through continual government advice and how it affected operations.
How to capture these events, how you should issue notifications, demonstrate entitlement, and recover costs incurred is still ongoing across the industry. This article will explore the challenges faced and possible solutions.
Effects of COVID-19 on Construction
The Coronavirus Act 2020 provided the government with the ability to introduce a raft of measures to reduce the transmission between people with the clear directive of ‘work from home wherever possible’ being arguably the most familiar. However, construction is such a people-driven industry that is it not practical for the majority to work from home.
But, the implementation of social distancing, screen installations and barriers, and changing shift patterns for workers to minimise contact will have had a disruptive effect on operations.
We can define disruption as a reduction in the output for planned activities brought about by restricted working methods or a stop/start approach due to changing guidelines or introducing new rules. This can lead to the prolongation of labour, plant, preliminary costs, and an overall delay to completion.
To mitigate these effects, contractors will move to different areas of the site to maintain a level of productivity. Still, working out of sequence and in a piecemeal manner also leads to reduced productivity levels and increased costs due to these smaller demobilisations and remobilisations across the site.
Effects are not constrained to the individual site and adjustments to working patterns, etc. There will undoubtedly be numerous plant suppliers required to promptly deliver vital equipment such that the works can be progressed and completed. For example, electrical equipment, M & E plant, specialist construction plant, and a shortage or restriction of essential materials due to factories working on a reduced output due to people shortages caused by social distancing will impact contractors on mass instead of individual sites.
Ensure Notices are Served and Updated
All standard forms of construction contract have processes regarding how contractors should notify clients if they consider there is entitlement to a delay or additional costs. These can be Relevant Events under JCT or compensation events under NEC contracts. In some forms, such as NEC, there is an obligation to serve a notice of anything that could affect time or cost that allows the client to mitigate the impact.
There are penalties for not serving these notices that can lead to a loss of entitlement, so the prompt serving of notices is essential, but also try to be specific and precise as to what it is that you are claiming i.e.
- Detail what has specifically been impacted as opposed to ‘global’ notifications.
- Under what contractual principle are you submitting the notice, i.e., refer to a clause or structure of your claim in the notification.
- If there is a fixed timescale for responding, make this known at the point of notification.
- If possible, provide documentary evidence through initial impacted programmes or provide similar notices of delay that you may have received from the sub-contractors or external suppliers.
Once these notices are served, and if the situation changes or develops, a good practice is updating them or serving follow-on notices with the same particulars. Once the events are certain enough that you can demonstrate the impact on costs and programme, signposting this back to the various notices issued will strengthen your case.
Principles of Entitlement
The Coronavirus Act 2020 is a change in the law. Therefore, consideration should be given if your form of contract allows for entitlement to recover time and cost because of changes in the law. For example, NEC Secondary Option Clause X2 “Changes in the Law” could trigger a compensation event, whereas under JCT, one of the Relevant Events is a change in statutory requirements.
Note that contractors have an obligation to mitigate any delay, but this is generally limited to a level of reasonableness, i.e., if they can change the sequence of activities to minimise a delay, at no or minimal cost impact, then they should take such actions. However, wholesale acceleration whereby they started working 24/7 would need to be agreed upon and instructed by the client.
However, you should proceed with caution if you intend on hingeing your entitlement to change in the law. The government provided guidance states that construction is one of the industries that should continue to operate. Therefore, whilst there has been a change in law, what are the actual effects on activities? Can these be directly linked back to the law changes, or are these just disruptive effects and therefore best placed to be connected to one of the reasons stated in either Relevant Events in JCT or one of the Compensation Events listed in NEC.
There is a general view across the industry that COVID-19 and the pandemic effects are to be classed as force majeure. Whilst there is no defined term for force majeure in English law, it is used to describe an event or series of events that is so unforeseen that it would be unreasonable for a contractor to have made allowance for it in their price, as it had such a small chance of occurring that it would have been unreasonable to do so.
Standard Form Contracts – Relevant Clauses
For JCT Design and Build Contracts, refer to Clause 2.26 and ‘force majeure’ albeit, as noted above, JCT does not define what constitutes force majeure; however, it’s generally considered to be an event that stops the contractor completing the works by the completion date and that it could not have foreseen such events occurring at the point of executing the contract.
If you can make a claim for COVID-19 as a force majeure event, you will be able to get time relief but not necessarily costs. This is because force majeure is a relevant event but not a relevant matter. Also, you will need to demonstrate that you have used your best endeavours to prevent delay and that if you fail to do so, you could lose your entitlement to time relief completely.
Suppose the works are impacted by COVID-19 for a period longer than stated in the contract particulars, which is typically two months in the absence of a stated duration. In that case, you can terminate the contract.
For NEC contracts, similar principles apply when determining entitlement, i.e., where JCT used relevant events and relevant matters, NEC has compensation events. One of these is Clause 60.1 (19) which, whilst not explicitly stated, is, in essence, a force majeure event. The wording includes
“an event which stops the Contractor completing the works or stops the Contractor completing the works by the date shown on the Accepted Programme and which neither Party could prevent, an experienced Contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it.”
If a contractor can demonstrate entitlement under this clause, they can claim for time and money.
Whilst the NEC approach sounds much better, the Achilles heel for contractors is that they must demonstrate they could not have foreseen the event or that it would have had ‘such a small chance of occurring’ it would have been unreasonable to have priced for it. The event must stop the contractor from completing the works.
Usually, contractors fall foul of meeting all the conditions to make such a claim. Still, as noted above, in terms of timing, they need to notify within eight weeks of becoming aware or lose entitlement under clause 61.3.
If you are seeking to measure the disruptive effects of COVID-19, there are several ways in which you can do this, such as:
- The measured mile approach whereby you can demonstrate that tender prices and outputs were achievable in areas of the works that were not affected by COVID-19, thereby setting your baseline against which you can overlay areas that have been affected to measure the difference, then extrapolate the assessment across all affected areas.
- It is imperative to ensure that you maintain contemporaneous records to back up any disruption or delay assessment.
- Be able to demonstrate what mitigation you undertook and why your endeavours were reasonable considering how the events unfolded.
- Also, in terms of mitigation, you have sought to reduce costs and minimise the commercial impact by challenging the validity and value of supply chain claims.
Notwithstanding the effect of the disruptive impact of COVID-19 then you may also need to consider the effect of funding on a project, i.e.,
- If this is a private development and, if funded via a third party, is funding linked to a completion date or maybe expected revenue? If so, consider how this will affect the project’s viability and if you need to adjust the financing arrangements, should there be a period of substantial delay.
When modelling delays into programmes, you need to demonstrate that COVID-19 has stopped you from completing the works, and this may extend to substantiating how:
- The progress of key activities on the critical and sub-critical path have been affected to the point that an unavoidable delay has occurred.
- That resource shortages due to travel restrictions or people self-isolating have impacted critical activities, e.g. tunnelling works will carry a small crew to drive and manage the TBM. If they were affected, they are not easily replaced.
- The ability to have materials or plant shipped or flown between countries.
- How delays in receiving specialist plant orders have been impacted due to delays on the contract prior to coming to yours.
- How social distancing guidelines have led to slower productivity rates or perhaps increased stoppages due to higher rates of health and safety considerations.
You may need to consider the effects on price and programme to date and how they will affect the works all the way through to completion. Careful consideration is needed and perhaps even qualify your quotation against the latest government guidance such that you can leverage future assessments should the situation change.
Future Bids – Taking Account of COVID
For contracts that are already executed but not yet complete, capturing the effects of COVID is paramount for a contractor to recover the commercial position. However, for works that are being tendered or for work programmes that are being planned, how should these be approached? Do contractors allow for large risk values in anticipation of another pandemic, knowing that they would struggle to rely on a force majeure claim again if this were to occur?
All they can do is take due cognisance of the government’s guidelines and how this affects programme and resources and price accordingly. If they were to price for the pandemic’s full effects in 2020, they would likely be uncompetitive, so careful consideration is needed, plus taking out a comprehensive insurance policy.