In the last two years, the effects of COVID-19 have had a major impact on how parties allocate risk in construction contracts. James Riddoch and Jordan Ropati of law firm Greenwood Roche explore some of the trends witnessed over this time.
Changes in government guidelines and regulations
Following the first lockdown and throughout 2020, the focus of COVID-19 clauses was primarily on the impact of lockdown and what would happen if there were future lockdowns. It was common practice for these clauses to allow for time and net cost adjustment if the government were to introduce measures more stringent than Alert Level 3 but for the contractor to price and programme for the lower Alert Levels.
The focus shifted following the introduction of the traffic light system to whether compliance with the red traffic light setting should trigger time and net cost relief – views have varied between contractors. It has been more common for parties to agree that:
- compliance with orange and green be factored within the initial price and programme (so changes to those settings do not trigger relief);
- the introduction of measures at least equivalent to the red traffic light system trigger time and cost entitlement if it impacts on the works; and
- the post contract introduction of regional boundaries trigger time and net cost entitlement if it impacts on the works.
With the arrival of the Omicron variant, the main compliance risk has shifted to the government’s isolation rules and the impact that has had on the supply of labour. We have seen some clients take a sympathetic view on this (certainly with the earlier phases of the Omicron isolation guidelines) but would not be surprised to see that view harden as New Zealand moves to a “live with COVID-19” mentality and isolation becomes a risk for contractors to manage (as they would other health and safety risks).
Shipping and supply chain delays with delivery of materials
COVID-19 and the measures taken by various governments around the world have caused major delays for a number of supply chains and the shipping industry. Risk allocation has varied quite widely on this. Some have stuck with the traditional stance that supply chain issues are an issue for the contractor to manage (noting generally greater contractor resistance to this stance than pre-COVID-19). On the other hand, some have allowed time and cost relief for certain “high risk” materials and focused resources and discussions on mitigating the risks through procurement plans and early warning requirements.
Cost fluctuations on materials
The impact of COVID-19 on the supply chain has often meant that contractors are unable to fix material prices at the point the contract is entered into and the actual prices have escalated from original estimates. As with the risk allocation for shipping and supply chain delays, practice has varied between the traditional “contractor to price and programme it” stance to allow targeted relief for certain “high risk” materials. Where relief has been allowed, it has typically been on the basis of net actual cost (as opposed to applying an index), the exclusion of margin on any such cost, protections against escalation focusing on the procurement plan (including the appropriateness of long leads and the availability of substitutes), and requiring evidence to substantiate that the escalated price is the best available.
Where vaccination has been mandatory on sites (which is not all clients and all sites), contractual requirements have varied. At one end of the spectrum, some clients have required the contractor to put in place procedures which require the contractor to both actively check that all members of the supply chain which access the site are vaccinated and substantiate evidence of compliance to the client. At the other end, some have dealt with it as a pure contractual obligation and an expectation (and trust) that the contractor will self-regulate.
Project viability takes a dive
The main risk to clients in taking greater risk on key issues associated with COVID-19 (as detailed above) is the project becoming unviable. We have seen this risk being managed in the following ways:
- ensuring appropriate requirements, conditions and fetters are placed on the time and cost adjustments;
- ensuring the contractual allocation risk matches any upstream arrangements (i.e. agreements to lease or development agreements);
- ensuring advice is sought from an experienced quantity surveyor on an appropriate contingency to factor into the budget;
- payment of net ascertained cost only with no profit payable on additional costs incurred due to COVID-19 to incentivise the right behaviours on cost mitigation; and
- the inclusion of a termination right if a project reaches a point where it becomes not fundable or unviable and pre-agreeing the consequences of exercising that right.
As COVID-19 has mutated and evolved so has the risks and contractual response. Appropriately for a pandemic some construction risks are also global which reflects the long supply chains in the industry.
As a final comment, the industry’s response to COVID risks has parallels to the market response to rent abatement in the sense that the response of the majority of industry participants has been moderate and collaborative. As landlords and tenants need each other so do clients need a solvent supply chain and contractors need viable projects. But, as with rent abatement, there have been exceptions.