Coronavirus – Impact on Construction

Under JCT forms of contract, force majeure may not be the only route to recovery. JCT provides that alterations or modification to works that are necessitated by a change in ‘Statutory Requirements’ – which arguably includes the introduction of new rules – gives rise to an entitlement to both time and money. For example, HSE enforcement of social distancing on construction sites suggested that the industry was required to comply with such rules, and this may have given rise to an entitlement to an extension of time and/or loss and expense under JCT terms.

The extent to which these provisions will apply will vary according to the terms of the contract and the specific circumstances giving rise to the delay or cost, and it is recommended that parties take a pragmatic and reasonable approach to their application.

• Specialist Contractors in particular are often cash negative for the majority of their contract period, making them extremely vulnerable to cash starvation and the risk of becoming insolvent. It is in the interests of Clients and Contractors to ensure that their supply chains are able to complete their projects by reducing the financial burden.
• Relieving financial pressure on businesses may also help to control the spread of the virus itself, as economic pressure can lead people to take greater risks in relation to social distancing in order to complete work and maintain programme.
• Where Clients take steps to support their supply chains, it is important that they actively monitor that payments flow quickly through the whole supply chain.

• The safety of the workforce and the general public is paramount, and any arrangements to progress projects should avoid placing cost and/or time ahead of safe working practices.
• Challenges should not be considered problems for individual parties to solve; they should be viewed as project issues requiring project solutions. Regardless of the contractual arrangements in place, all parties should cooperate as a project team with a shared focus on finding the most time and cost effective solution for delivering the project objectives within the current situation.
• Clients should lead the discussions as they know what their priorities are. For example, could they accept delayed completion if it mitigates cost, or is there a cost they can live with for completing on time?
• Direct engagement with the lower tiers of the supply chain is critical and may result in imaginative approaches to mitigate cost and/or time impacts on projects. Specialist Contractors often plan and resource their work within constraints and timelines determined by others earlier in the construction process; however, they may be able to offer flexibility to preserve or accelerate progress, for example longer hours, multiple or split shifts, or weekend working.
• Similarly, Consultants may be able to increase resources to speed up approval and/or acceptance processes. For example, 28 day periods for review and approval of drawings or method statements could be shortened.
• Ultimately, the Client knows what they want and what they are willing to pay for it and the supply chain understands what can practically be achieved and how much it will cost to deliver it. This is the dialogue that will form the basis for developing project completion strategies that all parties can live with.
• Whatever actions are taken, it is essential to make a record to allow the impacts of these actions to be evaluated, whether by negotiation or in a dispute scenario – see ‘Keep good records’ below.

• Act quickly to reach agreement on both historic issues and strategies for project completion to relieve all parties of uncertainty so they can focus on delivering the project.
• Be honest and take a realistic view of how to allocate responsibility for any problems that pre-dated the impact of COVID-19. It may be worth trying to separate the pre-COVID-19 phase of the project from the post COVID-19 period, for example by agreeing a ‘pre-COVID-19 Final Account’ and any extensions of time to draw a line from which to move forward. If necessary, make the agreement non-binding and, in the event a final agreement cannot be reached, all parties will have the right to have the dispute ultimately determined by a third party. The CLC has published a COVID-19 Cost Assessment Toolkit, which provides guidance on assessing the COVID-19 impacts on a project.
• Where contracts commenced after the pandemic started, it is likely they included recognition of the constraints that existed at the time the contract was agreed. If those constraints changed as the work proceeded, then the approach should be the same as for contracts that were ongoing when COVID-19 first struck and any changes should be recognised as a shared challenge and dealt with on a collaborative basis.
• Once historic events have been resolved, parties should agree strategies for the completion of the project. Open book arrangements may be beneficial as this will allow changes in COVID-19 restrictions to be managed – see ‘Use open book processes’ below.
• To give negotiations the best chance of success make use of ‘without prejudice’ forums for open and honest discussion of options across all tiers. The CLC Managing Contractual Disputes & Collaboration – Summary Guide includes advice on creating a ‘without prejudice – safe place’ environment for parties to explore options. More detailed advice can be found in the Contractual Best Practice Guidance together with template letters and notices for use with the most common forms of contract.

• It is rare that either the project or its participants benefit in the long run from allowing disputes to fester, so every effort should be made to reach a settlement agreement that allows cash to flow, projects to be completed and businesses to continue.
• However, where this is not possible, parties may need to obtain third party assistance in finding a settlement and should use the quickest method of dispute resolution available. The relative merits of dispute resolution options are outlined in the CLC Managing Contractual Disputes & Collaboration – Summary Guide.

• Contracting parties should clearly set out what is and is not included in the contract price and programme so that there is clarity as to which COVID-19 related events give rise to time and/or cost relief. As price and programme can be developed months ahead of contract commencement and legislation and guidance may change during that time, the parties should also include a ‘base date’ from which change is measured.
• A contract signed today should reasonably be expected to allow for current legislation and guidance on matters such as international travel, transport constraints and provision of PPE, and parties might choose to agree that these would not count as relief events.
• However, it is more difficult to make allowances for other matters, for example one or more project workers contracting COVID-19 or changes in legislation or guidance, such as local lockdowns, and these would give rise to relief should they occur.
• The CLC COVID-19 Cost Assessment Toolkit provides templates for recording inclusions and exclusions, as do collaborative standard form contracts, such as NEC Option C and JCT Constructing Excellence.

• In the current circumstances, where there is a high risk that developments around COVID-19 could cause fundamental changes to the time and/or cost of a project, there is a strong case for making contracts at all tiers ‘open book’. This provides visibility and established target cost and disallowable cost mechanisms, such as those used in NEC and the JCT Constructing Excellence contract, can be used to transfer reasonable contracting risk and incentivise efficiency.
• Such mechanisms are important to ensure that open book is not confused with ‘cost plus’ or ‘cost reimbursable’ where the entire time and cost risk of a project rests with the Client.
• Open book processes are therefore particularly helpful when it comes to measuring time and/or cost impacts of a COVID-19 event. For example, if a change in guidance reduces the number of operatives that can be on site at one time, it is very difficult to measure the effect if there is no transparency as to how many operatives were assumed in the original price.
• This avoids any arguments about what was included or should have been included and leaves the parties free to focus on how best to work around the new constraint.

• It is natural to focus on the risks of further outbreaks or increases in restrictions; however, construction projects can run for months or years and it is possible that restrictions might be relaxed or removed before a project is completed.
• Open book arrangements will allow Clients to benefit from such improvements to the same extent that they are taking the risk on delays or additional costs.
• Sub-contracts that are entered into later in the construction period might be subject to different restrictions to those that were in place when the main contract was entered into. Contracts should contain sufficient flexibility to ensure that best value can be delivered throughout the construction period.

• Whether the parties have agreed to work collaboratively or one party has given notice of a contractual claim, good records are essential.
• If a Client is to be asked to reimburse costs, they will expect to be able to audit what those costs are and that they were actually and necessarily incurred. If a party seeks to demonstrate a contractual entitlement, they will need records of the event giving rise to the entitlement and of the time and/or cost incurred. Further information on what records to keep and how to maintain them can be found in the CLC Record Keeping Guidance.