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Contractual Support

Construction projects across all sectors, irrespective of size and complexity, face similar risks relating to delays and additional costs. The severity and impact of these risks has increased exponentially since the outbreak of Covid-19 and Contractors will be undoubtably looking for opportunities to recover their losses.

The Construction industry is being urged to work in a collaborative way, with Best Practice Guidelines issued by the CLC and The UK Government published ‘guidance on responsible contractual behavior in the performance and enforcement of contracts impacted by the Covid-19 emergency’.

We are hopeful that many clients and Contractors will act responsibly and fairly and will adhere to the guidelines while still protecting their positions. However, there is a real risk that some parties may not.

There are several reasons for this: Pre-Covid performance problems, poor relationships, competing stakeholder interests or individual financial pressures, any of which could potentially result in dispute and litigation.

The standard contractual provisions that may be relevant to the issue of Covid-19 on a construction contract include instructions, changes or variations, compensation events, suspension, prevention and Force Majeure. Most of these provisions will entitle a Contractor to an extension of time, but only some of them will entitle a Contractor to recover the loss and expense they incur as a result. This is the big issue being debated in construction law right now.

How can we help you?

In the event of a claim or a pending legal dispute, we can help you minimise the impact on your bottom line. Our Contractual Support team consists of highly experienced Chartered Quantity Surveyors with a detailed knowledge of Building Contracts and Contractual Claims.

All of us have considerable experience in managing and resolving construction claims quickly, effectively and commercially when they arise.

Our focus is currently on reviewing all expert views on entitlement and on interpretation of the relevant contractual clauses.

The common issues we are helping clients with right now are:

  1. Reducing the risk of contractual conflict by encouraging the parties to come to the table early to discuss openly the impact and consequence on site due to closures and measures required to move forward in a safe environment, complying with all guidelines
  2. Interpretation of what constitutes a relevant matter/compensation event where financial reimbursement is valid under the contract and what does not
  3. Where loss and expense claims and conflict does arise, we use our expertise and experience to validate or reject the claim and advise on the best course of action to reach agreement on an acceptable way forward for both parties.

Frequently asked Questions

Answers to the most frequently asked contract-related questions from our clients across the UK in the last month:

Fit for purpose?
The Covid-19 pandemic has highlighted that current construction documents are not generally drafted to deal with circumstances like these. Much of the current legal discourse is focused on the interpretation of contractual clauses being challenged and setting out the ground rules for negotiating contracts for new projects.

Future Risk Mitigation
A big issue that will shape future contract negotiation is how the pandemic-related risks are shared between the Contactor and the Employer. Currently, most risk is very much sitting with Contractors, who will potentially be facing increasing margin and cashflow pressure as a result. Their focus will be to build in clauses for new projects to recover time, but more importantly to define the circumstances where cost can be recovered against this time. We are predicting much more heated discussion around relevant events versus relevant matters/compensation events. Contractors will be looking for the ‘Golden Bullet’ where there are clear provisions to extend time and recover cost. You will clearly be looking to minimize your exposure to programme delay and increased build costs. Contractors will most probably look for a specific re-write of certain clauses for new projects and most likely try to get the definition of Force Majeure clearly defined in the context of the building contract. COVID-19-related claims in the future could be limited because there will be the argument of foreseeability in play. We predict that Contractors will argue that, even if the existence of COVID-19 itself does not qualify for Force Majeure relief, they are able to claim relief where the spread or impact of COVID-19, or other pandemics, impacts workforce and supply chains above a threshold that was foreseeable. Contractors will not want to bear the risk of such events and equally, you will not want to see longer programmes, and more expensive build costs that could potentially arise from Contractors factoring in eventualities like these. Nor do you want to see loss and expense claims at every turn.

Recommendations
You should consider including amendments expressly allocating the risks between the parties, including programme delay and any associated additional costs, as well as responsibilities in the event of site closure. Amendments should also include site security and de- and re-mobilisation, arising from COVID-19 epidemics and pandemics more widely.

We strongly recommend that you seek specific legal advice in the near future in order to ensure that there is enough time to consider all necessary contractual amendments and provisions that may need to be added to the form of contract, and to ensure that these meet the requirements of all stakeholders and internal governance.

Force majeure, at its simplest, can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and whose effects prevent performance of the contract.

Derived from the literal French translation for ‘superior force’, force majeure clauses are found in most commercial law contracts but the term ‘force majeure’ does not actually have a recognised meaning under law.

Whether the legal interpretation changes, remains to be seen and it is perhaps too early to define what that would be.

Recommendations
Parties should be wary of just adding a general “pandemic clause” to a contract or similar. There is no one size fits all in relation to the effects that could arise. It is best to consider the specific risks that could conceivably occur (in relation to timing, price, damages, changes to statutory requirements, termination and suspension) and add amendments to those clauses specifically rather than adding a clause with could contradict other clauses within the contract.

Early warning notices should not be issued for the purpose of allocating responsibility or liability. When dealing with matters which are the subject of an early warning notice, the emphasis should ideally be on agreeing the steps required to address the matter rather than allocating blame.

Receipt of the Contractor’s early warning notice should be followed by a risk reduction meeting. Mitigation measures and/or contingency planning can be agreed together with a review of supply chain implications.

Both the PM and Contractor are encouraged to notify early warnings in that it affords the Employer greater opportunity to better control potential time and cost impacts. The Employer retains an element of completion and/or cost certainty whilst the Contractor does not forfeit the opportunity to fully assess the compensation event quotation.

The early warning process recognises that both Parties will encounter problems during the course of the works and facilitates working to overcome them collaboratively.

The Contractor is likely, subsequently, to notify a compensation event but remember there is no direct link between early warning notices and compensation events. An early warning notice might not lead to a compensation event and a compensation event might occur without an early warning notice.

The main difficulty in assessing a compensation event triggered by the COVID-19 outbreak will be the requirement to forecast its effects into the future. This is a difficulty which is bespoke to the NEC contract because the NEC compensation event mechanism is premised upon compensation events being assessed whilst a project is on-going, instead of waiting until the end when all of the effects of the event are known.

There are numerous provisions within the NEC contract which a Contractor can rely upon because of the impacts of COVID-19. Nonetheless, the emphasis under all forms of NEC contracts will be for the Contractor, Client and Project Manager to act in a spirit of mutual trust and co-operation and work together collaboratively to mitigate any adverse effects of the pandemic.

In short, the answer is the Employer should formally respond to this to protect their position, regardless of the current COVID-19 situation.

Adjustment of the Completion date under the JCT DB 2016 is dealt with in clauses 2.23-2.26.

As soon as it becomes reasonably apparent that progress of the works is delayed, then the Contractor should issue a Notice of Delay, identifying what, in their opinion, is the cause and Relevant Event.

The Employer should respond within 12 weeks from receipt of the ‘required particulars’, to notify their decision and either award or not award an extension of time. The Employer is permitted to respond earlier than 12 weeks if required and particularly where the Completion Date is less than 12 weeks from the date of receipt.

The time period for a decision commences only once ‘the required particulars’ have been received. The question will arise as to what the particulars are specifically. The contract does not provide an answer, because the type of particulars is likely to vary from one case to another. Suffice to say it is this case-specific information which provides the required substantiation to clearly outline the cause and effect and the basis upon which the Contractor believes an extension is due.

The Contractor’s request should be specific, clear and concise to prevent any undue delay in the assessment.

If an extension of time, as a result of a Notice of Delay, is granted during the course of the project, the period of extension must be reviewed after the completion of the works. This must be done within 12 weeks of the Date of Practical Completion.

The Contractor is required constantly to use best endeavours to prevent delay, or further delay, to progress. Besides this obligation, the Contractor must demonstrate the event’s impact on the programme critical path and establish whether this event alone is the dominant cause of delay to the Completion Date, when all other factors are considered.

It is worth remembering that a Relevant Event may not constitute a Relevant Matter, which is the means by which the Contractor can recover cost.

Covid-19 has had a profound commercial impact for all Contractors. Every single one of their construction projects will have been impacted by site closures, loss of productivity, supply chain problems and adapting to suit new operational practices. Contractors will be looking for opportunities to recover their losses.

Under JCT contracts, Contractors are entitled to claim for time under the relevant events of force majeure or enactment of government statutory powers, but critically this does not entitle them to claim for the cost of that delay (unless the Employer instructed the works to be suspended). This differs from the NEC contract which is more likely to grant time and cost through a compensation event.

If a Contractor cannot claim for the delay costs caused by Covid-19, how else can they seek to recover losses? There are three key areas to consider:

  • Seeking recovery through contract variations and instructions
  • Claims against the Employer where their actions have caused delay
  • Reducing the quality of works and materials.
Changes to the Works

Changes (variations/instructions) are a Relevant Matter under the JCT contracts or a Compensation Event in the NEC. Where a Contractor can demonstrate that changes have caused delay, costs can be recovered. Contractors may also seek to inflate the cost of a change to recoup some losses. If there are a large number of instructions issued during construction, the Contractor will be in a much stronger position to submit claims for loss and expense.

In simple terms, the best way to protect yourself from claims of this nature is avoid varying the works while on site.  However, this is not always viable, especially when some works are still to be defined or cost certainty is not high (typically evidenced through large quantum of provisional sums). If you are in this predicament then you need to carefully consider both the practical and commercial approaches to dealing with the risk.

Practical approach

From a practical perspective, change control processes should be utilised. This is standard practice for most projects but, given the current environment, it is critical that the process is robust.

Change control is used to agree the impact of a change before it is instructed. When administering the process, you should ensure:

  • The early identification and resolution of change

There should be plenty of time between agreeing a change and the works needing to be carried out. Beware the impacts of the invariable negotiations, design development and supply chain challenges which will quickly eat into programme.

  • Both cost and time impacts are considered and agreed up-front

As well as providing a quote for the cost impact the Contractor should confirm whether the change will cause a delay to the project. This safeguards you against future claims for loss and expense.

  • Strict timescales agreed for the change control process

Both parties need to commit to clear timescales for the review of change. It may take several iterations of the process to reach agreement, and timescales need to be tight. If these are not set out within the original terms of the contract, then you should seek agreement to formalise this.

  • Acknowledge the need for design work to resolve

Often a change is put forward with minimal design in place. The change control process identifies a price and time impact and often, the client believes all is agreed. The risk is that the design is then undertaken and either not aligned with your expectations, or the Contractor considers it to constitute further change. It is generally better to obtain a quick estimate of a change and then instruct the design work prior to any change being instructed.

Delays caused by you, as the Employer

This is a greater risk on projects where the client retains responsibility for the design, but even with design and build you are at risk if you are late in providing information. On a design and build project, typical matters you will be responsible for could include:

  • Late approval of design and materials
  • Late supply of client purchased equipment/materials
  • Delay caused by named Sub-Contractors
  • Delay caused by utility connections, where the responsibility lies with the Employer.

The first step to mitigating this risk is to ensure that there is clear agreement is in place on when Employer-led activities need to be completed. This should be set out in writing and confirmed by both parties. Before agreeing to the dates, you should liaise with the appropriate stakeholders and supply chain to ensure they are achievable.

In terms of design and material approvals, an Information Required Schedule (IRS) should be established, setting out the timescales for issuing of information by the Contractor and when comments need to come back. Most contracts will set out the timescales for a response, however, the review process is often iterative which means there will be some discussion prior to sign-off which can slow the process down. In establishing the IRS, the Contractor should be challenged to set as early a date as possible for the release of information, providing sufficient time for review and agreement. For example, it is not reasonable for a Contractor to issue design information and expect it to be reviewed and agreed within two weeks.

While these practical steps will help mitigate the risk the onus will remain with you to manage the various activities and ensure the team is keeping to the agreed timescales for a response.

Reducing the Quality of Works & Materials

The focus for the Contractor might be to reduce the cost base on which they have priced the works. While the works are defined by the contract, there are invariably gaps, and where a Contractor is under commercial pressure, they may well seek to take advantage of this by opting for an approach which will not ultimately meet your expectations. In some instances, a Contractor may decide to substitute products for a lower quality option whilst not making this clear to you.

Another risk is that a Contractor goes back out to market and selects Sub-Contractors that are offering a lower price. The need to mitigate their losses means they may select questionable Sub- Contractors, which could impact upon the quality of the building.

To protect against this risk, it is important that you have a good inspection regime in place, both in terms of design review, but also site inspections.

Commercial Considerations

Even where you and your team are on top of your responsibilities, have instigated a good inspection regime and established a robust change control process, Contractors are likely to push hard in seeking opportunities to recover their losses. You may end up in the position of having to accept a change with a higher than acceptable cost/time impact, or potentially end up in dispute over the matter at a later point.

In a scenario where you anticipate little change during the works then this could be an acceptable position. Where you are likely to be facing a large amount of change on a contract, then you should consider a more commercial approach to mitigate the risk of dispute later.

It is unlikely to be in your best interests to quibble over every single variation and claim. This will result in excessive resource spent on managing the claims and is likely to lead to dispute proceedings. The biggest winners in this situation will be the lawyers. The best option, for both parties, is to recognise the commercial realities of the situation, namely the Contractors need to recover some of their losses incurred through the Covid-19 impact and seek some form of remedy.

We have seen the success of this commercial approach on several projects, where early agreement has been reached to share some of the pain suffered by the Contractor from the Covid-19 event. The agreement sets out how the parties are to deal with the impact in terms of both time and cost and that there will be no subsequent dispute on the matter. By sharing some of the pain, the risk of an adversarial relationship for the remainder of the contract is reduced. The practical steps described above will still need to be maintained, but the process should be less fraught as the underlying problem has been resolved.

The reality is that every construction contract is unique, and the position of each party will vary. What is important when considering your approach is to take positive action rather than waiting for events to unfold. We strongly recommend that you get on the front foot and take the actions that will enable the best outcomes for the project and reduce the risk of dispute, which so often results in increased costs and programme delay.

Contact me in confidence for an initial discussion

Dorothy Robertson
E: dorothy.robertson@rlf.co.uk
T: +44 (0) 141 225 0470
M: +44 (0) 7879 600145

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