The COVID-19 pandemic has given rise to a construction boom fuelled by government grants and low interest rates. As a result, building costs are climbing faster than inflation. 

After working to adapt to pandemic impacts in 2020, contracting parties face new challenges in 2021 as demand for labour and materials exceeds the available supply. We have an expert opinion piece from Steve Pyman from CDI Lawyers who has a high profile in the sector advising developers and constructors alike.

Significant contributing factors include:

1. A government grant-fuelled surge of activity in the domestic building sector

2. Freight constraints leading to decreased import of materials from offshore suppliers.

3. Labour shortages due to border closures.

There is a risk for Contractors in trying to  price the risk of supply issues upfront in the current market.  This risk can be reduced if Contractors nominate items that may be vulnerable to supply shortages as provisional sums. This exposes the Principal to price fluctuations that may exceed its budget and impact its ability to obtain finance for the project.

This article outlines the perspective we have gained from recent experience where contracting parties have worked with the Principal to manage uncertainties regarding cost and time in the face of this unprecedented market.

Bulk ordering materials

Sharing the risk of rise and fall

We see Principals moving away from contracting models that promote ‘risk dumping’ and entrenched protections where one party’s interest is subordinated to the other. These contracts lead to a misalignment of interest and inevitable disputes. Instead,there appears to be  a  mindset  shift to a ‘best for project’ focus.

We are  now seeing an increased frequency in Contractors requesting a cost escalation clause for certain products, particularly structural steel and timber.

Force majeure and COVID delays

Force majeure clauses that allow the Contractor to claim for COVID-related delays are the norm in head contracts in 2021. However, usually,a force majeure clause will only protect a Contractor if the event is not reasonably foreseeable. 

Typically, we do see Principals permitting the Contractor EOT  relief ( but not delay damages)  for COVID related events that come into existence after the date the parties signed the contract, such as Government-mandated lockdowns.

Any such entitlement should be drafted to ensure the Contractor is required to provide timely notice and detailed documentation demonstrating that the delay was unavoidable. The Contractor may additionally be required to include a contingency in its program for supply and labour issues.

While these clauses cannot eliminate delays, they can provide some commercial certainty for a Principal. Principals should be allowing a more extended time between completion of construction and handover to a subsequent purchaser or lessee to mitigate against the risk of unpredictable supply delays. 

Conclusion

While increasing vaccination rates will hopefully provide some relief, the consequential impact of COVID on the construction market will be felt for some time. There is a conflict between adherence to the traditional fixed-price design and construct contract model and the current need for Contractors to pass on unforeseeable cost increases post-contract. 

Contracting parties must maximise innovation and value engineering to steer construction projects through the challenges that lie ahead. These challenges call for collaboration and communication in good faith between contracting parties to find solutions that drive ‘best for project’ outcomes.

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