We recently provided an article on the impact of COVID-19 restrictions, Ports of Auckland delays and spike in construction activity on the supply of building materials and shortage issues that were developing.
Further reports this week have shown that this situation is worsening and is likely to be a feature of the industry for the foreseeable future.
There are numerous reports of construction projects being delayed due to a shortage of building supplies. There was always likely to be an impact on specialist products from overseas but the shortages of basic materials, particularly plumbing, electrical and glass supplies earlier this year has now spread to include fundamental supplies for any construction project including steel and timber framing. The shortage of building supplies clearly has a wide reaching impact across the industry.
Alongside general supply shortages we are also aware that some suppliers are imposing minimum volume or value requirements for orders which is limiting some areas of the market to bulk orders only. This is of particular concern for smaller contractors who may not be in a position to place orders of sufficient volume.
Both contractors and principals alike are seeking ways to mitigate the issue. At a commercial level we are aware of stockpiling of materials and contractors pooling together so as to be able to make bulk orders to deal with the threshold requirements being imposed by some suppliers. We are also being asked to provide advice in relation to existing contracts to assess where the risk of supply shortage and rising materials costs lies in terms of both cost and delay, and also what provisions can be added into future contracts to cover these issues.
There will inevitably be cost and delay issues to current and future projects. There are various contractual provisions which come into play:
- Cost fluctuations;
- Grounds for delay;
- Off-site materials;
- Substitution of materials; and
- Variations.
It is likely that the risk of supplier delays will fall on the contractor and will lead to the contractor being exposed for the consequences of late project delivery including liquidated damages.
Usually there is no specific right for a contractor to claim an extension of time under its construction contract for supply chain delays. In the absence of a specific provision covering this issue a contractor is likely to be left with seeking to rely on the common extension of time ground of circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor (10.3.1(f) NZS 3910:2013).
It then becomes necessary to analyse whether or not supply chain issues were reasonably foreseeable at the time of tendering. It is clear that there are wide ranging supply issues and so depending on what the time of tendering is it may therefore be very difficult for contractors to be able to successfully argue an extension of time claim under 10.3.1(f).
It is therefore vital for contractors to take into account current and potential future supply delays when agreeing a programme for a project to try and mitigate the risk of late delivery. Contractors should check current contracts to see whether they have supply related delay clauses they can rely on. For future projects contractors should consider the inclusion of tag to cover this risk.
We are seeing a sharp increase in the use of off-site materials agreements so that contractors can try and source as many materials as possible for a project at the earliest opportunity. This is being done partly due to fear of not being able to source materials in the future when they will be required for a project but also to mitigate against increasing costs. This can be beneficial to both contractors and principals alike and seems one of the best current solutions for keeping developments on track. Whilst this may mean principals are exposed to paying for materials earlier than they intended and significantly ahead of the materials being incorporated into a build it mitigates the risk of projects being delayed. The key is for title in those materials to pass on payment and for the materials to be clearly labelled as belonging to the principal. The principal can, and should, protect their interest by registering a security interest on the PPSR. Contractors are unlikely to be able to cashflow large stockpiles of materials, particularly where they are working on multiple projects so principals will need to be willing to pay for materials up front. This will in turn require an ability for principals to be able to fund this up front payment.
Communication between the parties remains key, as has been seen recently with other issues in the construction industry, such as COVID-19 related issues, so that resolution can be reached and the impact on the project is minimised.
Please contact Julia Flattery or Jonathan Forsey for further information.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
