January 24, 2022
COVID-19 will be a consideration for all construction projects for the near future. The resilience of industry participants has been tested by lockdowns, government directions and contractual agreements that had not contemplated the pandemic.
The practical implications of COVID-19 for current projects are labour and supply shortages may mean that disputes emerge on many construction project horizons.
Practical Implications
Labour Shortage
As government restrictions ease, many companies, across industries, have started to consider implementing mandatory self-isolation periods and/or vaccination requirements for their employees. The discussion around these decisions often focuses on the health and safety of employees, project completion, and concerns of prolonged delay. Ultimately, participants in the construction industry should conduct a high-level risk assessment of the biggest issues they face and strongly consider the commercial and contractual implications of implementing company-wide mandates.
For example, a self-isolation, work from home mandate may be an appropriate way to mitigate the risk for office employees while also allowing for work to be completed. However, the same cannot be said for on-site employees, rather, one might consider implementing strategies such as, scheduling staggered start, break, and end times for all employees.
Supply Shortages
Supply shortages have led to disruption to production, manufacturing, and importation of key materials for the construction industry. The supply shortage coupled with the rising demand for materials like concrete, timber, steel, and aluminium has resulted in increased material costs and project delays.
While these high material costs and prolonged delays expose contractors to liability for delayed project completion (resulting in payment of liquidated damages) as well as increased construction costs (cutting into profit margins), principals also face project completion delays and risks of contractor solvency issues contributed to increased material costs. Put simply, it is in the best interests for both parties to consider the most appropriate way to manage supply shortage risks.
Depending on where the life cycle of the project currently sits (and the allocation of risk in the contract) labour and supply shortages may give rise to claims for extension of time and in turn delay costs.
Delay
The allocation of risk in a contract will inevitably effect whether the principal or contractor is responsible for the time and costs of a delay.
Depending upon your contract, contractors may be entitled to claim for delay (and costs) as a qualifying cause delay. This term (qualifying cause delay) is typically defined in a contract and may include labour or workforce shortage or supply or material shortage. If they do, a contractor will be entitled to an extension of time and possibly compensation.
To avoid disputes regarding the validity of an extension of time claim, contractors should review their contracts to ensure compliance with contractual terms prescribing the procedure for extension of time claims.
Cost Escalation
When entering a contract, the price of materials is often provided for as a lump sum; however, if your contract does not include a clause for cost escalation, the contractor is typically responsible for any costs for materials that go above and beyond the agreed lump sum.
To mitigate cost escalation, a contractor can identify certain items that are likely to be subject to cost increase and include a clause allocating risk to the principal for an agreed upon percentage above the agreed lump sum. Alternatively, a contractor may seek to mitigate cost escalation by having the principal secure key materials for the project (as principal-supplied items).
Lamont Project & Construction Lawyers
Our team at Lamont Project and Construction Lawyers, are specialist advisors in the Major Project and Construction sector and are highly experienced in resolving complex litigious matters across all industries and sectors. We have the industry knowledge and experience to assist both Principals and Contractors in their unique challenges and implementation of contractual frameworks that best align with project objectives. If you have any questions about any matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Quinn Hironaka
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