Tools down in a hands-on industry: COVID-19 lockdown and construction delays27 March 2020
The outbreak of COVID-19 has seen cities and towns across the world placed into lockdown.
In Australia, the likelihood of an industry-wide lockdown of construction sites is increasing, if not imminent. Quarantine restrictions will also have a negative effect on manufacturing and the supply of equipment and materials used in the construction industry.
Construction projects rely on site labour and supervision to progress works. Quarantined sites will cause widespread delays to projects. Contractors and subcontractors that can’t advance works will be unable to claim their monthly progress payments, with the result that cashflows will be curtailed, while liabilities for construction costs and overheads will continue.
Principals, dependent on timely completion of their projects, will be impacted by delay in securing the projects for intended purposes.
Delays under the contract
Depending on the terms of contracts, contractors and subcontractors may be potentially exposed to breach allegations for failing to progress works and to claims for delay damages, whether liquidated or general in nature. These companies may also face the risk that their construction contracts could be suspended, such as for the protection of people, or terminated.
Aside from any government financial and legislative relief, or credit assistance or moratorium from the banking sector, the financial and liquidity effects of stalled construction will be dramatic and significant on all players. Labour lockdown will also increase the likelihood of insolvencies for many participants, that notwithstanding financial and regulatory relief, may not be able to meet their payment obligations, whether principals, contractors, subcontractors or other suppliers.
Generally, construction contracts require head contractors and subcontractors to complete works by a fixed date. The consequences of not achieving timely completion will depend on the specific terms of the contract, including whether delays are excusable or non-excusable.
Excusable and non-excusable delay – the importance of notice
Excusable delays or qualifying causes of delay are usually well defined in contracts. In some cases, they may include force majeure events that could include an event such as the COVID-19 pandemic.
Where a delay event occurs, contractors may be entitled to make a claim in accordance with prescribed processes, for an extension to the date for completion and, in specified cases, for the costs of the delay.
In any event, contractors should now give notice of the potential or actual delay likely to arise.
Non-excusable delays that cannot be ameliorated, such as by acceleration of works, may give rise to substantial risks—including suspension of works, termination of the contract or a reduction in the scope of works. In some cases, without concession or variation to the date for completion by a principal viz their head contractor, or a main contractor, viz their subcontractor, liquidated damages will likely become payable.
The way in which a site shutdown comes about will be important in determining whether an excusable or non-excusable delay arises. For example, a contractor may voluntarily withdraw labour and supervision for reasons of health and safety, governments could mandate a lockdown or a principal may direct a site shutdown and suspension. The parties’ rights and obligations under the contract relating to site access, suspension, variations and change in law will also be important, in addition to whether the delay is excusable or not.
Knock-on effects of delay
Where a site shutdown does not qualify as an excusable delay, contractors will continue to bear the responsibility to achieve the contract completion date.
Even if the pandemic can be characterised as an excusable delay, works will not be able to be advanced while sites are locked down and contractors will not be able to make progress claims for payments to defray their on-site and off-site overheads. The cash flow consequences for contractors could be significant, including affecting their capacity to pay their construction workers and staff, suppliers and subcontractors and potentially placing them in breach. The risk of potential insolvency for head contractors and subcontractors, and possibly also personal liability of directors of insolvent contractors, could dramatically increase and with knock-on financial consequences for all participants in construction projects.
We’ve prepared a chart that shows some of the potential impacts and implications of delays resulting from a COVID-19 site lockdown, depending on the specific terms of each construction contract.
What does this mean for you?
The success or failure of a construction project will often depend on meeting the construction program and the timely notification of probable delays. Quarantine restrictions resulting in the shutdown of construction sites for some months will inevitably delay completion—with the potential for dramatic implications for all participants.
Notwithstanding contractual rights, parties need be mindful of their primary objective to achieve successful completion of works in a timely manner and to take all such steps (as may be available) to ameliorate the adverse consequences of a site lockdown, including considering readjusting their contractual relationship and the rights and obligations of the parties for a best for project outcome having regard to extraordinary circumstances.