COVID-19 and construction contracts
As of 26 March 2020 it is only essential services on site construction work that is permitted to continue. This is defined as works which:
- relate to essential services e.g. hospitals and supermarkets;
- relate to critical infrastructure; or
- are needed to maintain human health and safety at home or work.
No other on site works are permitted.
For the basis of this article the clause references are to NZS3910:2013 but similar provisions can be found in the other NZS contracts and should be present in most bespoke contracts in use in New Zealand.
There is some debate within the industry as to whether the circumstances should be dealt with under construction contracts by way of an extension of time due to events unforeseeable by a contractor under clause 10.3.1(f) or a suspension of works under clause 6.7.1.
There is a critical difference between the consequences of 10.3.1(f) and 6.7.1: the ability for the contractor to claim a variation and cost as opposed to just an extension of time.
There is not currently a consistent approach from Principals and Engineers in relation to the service of a suspension notice under 6.7.1. Some have done so, some have refused and others are instead inviting discussions under 6.7.5 which allows for a suspension to be negotiated on terms acceptable to both parties. We have come across various reasons why suspension notices are being refused but there does not seem to be a consistent argument being raised.
The message across the industry is clear though: what can we do now to ensure that projects can resume as quickly and efficiently as possible once the lockdown is lifted?
The key will be to maintain good communication across all layers of the project and ensure that all parties are in a position to resume works. Therefore a risk sharing approach needs to be taken. If all the risk is put onto contractors and subcontractors then this creates a real cashflow issue and in some circumstances may lead to insolvency. This will cause issues in both the short term in relation to affected projects but will also lead to a weaker New Zealand based construction industry in the future.
On a practical note there are some steps that can be taken and we would encourage you, where appropriate, to have those discussions. These include:
- early/partial release of retentions – this will assist with cashflow
- relaxation of bond provisions – this will free up capital and/or securities to enable additional lending to be secured
- advance payments – we note that governmental institutions are planning to do this on their projects
- discussing cost and delay mitigating measures that can be worked on during the lockdown, for example value engineering or reprogramming
- renegotiating with suppliers of plant, materials and equipment.
On a more positive note the current view is that the supply chain issues in relation to materials have been eased given that the previous shut down of factories in China has ended. There are some concerns around specific materials that may be in short supply when works are resumed due to their being a surge in demand. It is therefore crucial to be in communication with your suppliers at this time.
The effective closure of the borders may have an impact on sites reliant on an overseas workforce but this is difficult to assess at present.
We have been advising and assisting principals, contractors and subcontractors with regards to these issues over the last couple of weeks. If we can assist you with any of your projects please contact Jonathan Forsey or Julia Flattery.
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. While we make every effort to ensure the accuracy of the information contained in this article, this is a rapidly changing environment and the information will be subject to change.