Thursday, April 23, 2020
We are living in unprecedented times. A few weeks ago, we never imagined that this would be our opening sentence to any of our publications. The focus now is ensuring the health and wellbeing of our family, friends, and work colleagues during this COVID-19 pandemic.
It is still too early to understand the full implications of the COVID-19 crisis, but it has already permanently changed the Irish economy.
The impacts on the construction and property industry are profound. Construction sites are closed (excluding essential works1), workers have been temporarily laid off and areas such as public tenders, planning applications, planning decisions etc. are all affected.
Government restrictions and site closures have put the construction and property industry in unchartered territory. Employers may have construction projects committed at various stages from recently signed contracts, construction mid-stream or projects close to practical completion.
Review contracts and seek legal advice
In the first instance, employers will need to carefully examine their building contracts to ensure they fully understand the contractual impact of the COVID-19 crisis on their projects. Many contractors have issued some correspondence by now, laying the groundwork for potential claims for extensions of time and, in some cases, monetary compensation.
Whilst the position will remain unchanged in public works contracts, across the private sector various industry form contracts are used (e.g. RIAI, FIDIC, NEC, JCT) which are typically subject to negotiated amendments tailored to the project in question.
The COVID-19 crisis has brought into consideration the provisions in relation to force majeure, extensions of time and, since the introduction of Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 and subsequent further regulations2, change in law clauses. As each contract will be different, it is critical that employers have a clear understanding of the position across their own contract(s).
Further, given the uncertainty around the duration of site closures and government restrictions on movement of people during this crisis, it is possible that the progress on some contracts may be irretrievably frustrated. It is important therefore that employers understand the position under their own contract and seek advice from their contract administrators and legal advisors. Any correspondence received from contractors will have to be examined for compliance with the contract and may trigger a requirement for employers (or the contract administrator) to respond to such correspondence.
Fulfilling obligations under the contract
Employers must also not lose sight of their obligations under the Construction Contracts Act 2013 (the “CCA”). Notwithstanding that the contractor may not currently be on site there will likely be payment obligations for the employer to discharge which arose prior to any suspension of work. It is important that any payment claims for works done prior to suspension are assessed in the usual way and discharged within the stipulated time frames for payment as required by the contract and the CCA. Employers are reminded that failure to pay any sums due under the contract by the time for which they are due will entitle the contractor to suspend works.
Whilst contractors may not be currently on site there are still obligations that can be discharged remotely without the requirement to be physically on site. If the employer fails to discharge sums due for work done prior to suspension this would validly entitle a contractor to suspend all work (including work which can be progressed remotely) which will result in delays to the project further down the line.
Contractors may be able to discharge certain obligations remotely during the closure of sites, which may entitle them to apply for interim payments under the contract during this period. Again, such applications will have to be assessed and certified in the usual manner and if they entitle the contractor to receive payment then the Employer must discharge such payment in the normal way.
As already noted above, by this stage employers may have received some form of notification from their contractors in relation to the stoppage of work on site. It is therefore crucial that employers are aware of the terms of their contract in relation to extensions of time and/or claims for compensation for force majeure and/or changes in law.
Valuations are normally submitted monthly. The timing differs from project to project. Pending the date, there may be an obligation on the employer to pay for works completed in March prior to the shutdown. It is important to check these dates. In order to comply with the obligations under the contract and the CCA as outlined above, it may mean that works may have to be valued by the quantity surveyor (QS) and certified by the contractor administrator without them visiting the site.
Some key points to consider:
Get ready now and plan for return
The employer along with the contractor should now start to strategise on a plan for a return to site and a programme for recovery. It may be difficult to plan and make projections at a time when there are so many unknowns. Failing to plan at this stage will prolong the delays and exacerbate the impact of the current lockdowns.
Certain off-site tasks should continue as much as possible. This will allow projects to progress in terms of design, co-ordination, submittals, sign off, fabrication etc. It may even be a chance to implement some value engineering proposals, alternative products and supply chain review that normal construction timelines would not have allowed for. This can all be done by remote video conferencing. Interim cashflow arrangements with contractors and specialist sub-contractors may need to be agreed during the shutdown. Contractors should evaluate the consequences of delays and prioritise the mitigation of this impact. Once work on construction sites starts again, it will be a changed workplace and progress may initially be slow. Planning now for the recovery is essential. Failing to plan at this stage will prolong the delays and exacerbate the impact of the current lockdowns.
Potential impact on construction sites forward
Some specific COVID-19 health and safety requirements will be required when sites re-open. We are likely to see changes such as:
The contractor’s health and safety plan will need to be updated and reviewed in detail by the employer and the design team to understand the implications on the project. Some of the above may affect the programme. The extent of meaningful progress on site will need to be weighed up against the end date and potential future financial implications. The CIF have provided guidance notes in relation to standard operating procedures (SOP) for when sites re open.
Potential business impacts going forward
It is extremely difficult to predict the impact on tender prices in the short to medium term as a result of COVID-19.
It is difficult to know if there will be inflation or deflation after this period and how this will affect future property development models. Buildcost construction cost guide publication provides further commentary on this. Future construction contracts may look different in the wake of this epidemic i.e. COVID-19 may no longer be a force majeure or unforeseen event.
Looking forward, people’s requirements are likely to change. Different development models / asset classes may be required in the future. Companies will need to be agile and quick to adapt to the changing requirements. Delivering schemes on the backdrop of COVID-19 will probably be the most difficult challenge the industry has ever faced. All sectors of the industry will be in a different place post COVD-19.
It is important that the employer maintains detailed records in order to protect their position. There may be future discussions to be had in relation to extensions of time, contractual claims, contractor`s and subcontractor`s financial stability, bonding companies, new restrictions etc. on projects where construction has stopped. All risks will need to be considered in detail and solutions sought, to allow projects progress.
1. Introduction of the Health Act 1947 (Section 31A – Temporary Restrictions) (COVID-19) (Amendment) Regulations 2020 and its impact on the Construction Sector
2. Update to the Health Act 1947 (Section 31A – Temporary Restrictions) (COVID-19) (Amendment) Regulations4444444 2020