SECTOR SERIES: Challenges as Construction Gets Started

SECTOR SERIES: Challenges as Construction Gets Started

May 18, 2020

Getting Back on Site – Challenges as Construction Gets Started After Covid-19 Shutdown

By the end of April, 70% of sites operated by major contractors were open again and virtually all the major house builders were back in operation, driven by the severe financial implications of the lockdown. A survey in early May suggested that the industry had been losing more than £300m a day in lost output and that the cash reserves of subcontractors were almost exhausted.

Unfortunately, for most in the construction industry any sense of relief must be tempered by the alarming range of obstacles to achieving any form of normality, whatever that might look like after the pandemic.

Returning to work whilst maintaining social distancing

The practicalities are daunting. Some rogue contractors made unwelcome headline news early in the crisis by flaunting social distancing requirements on site, making life troublesome for the whole industry by sensitising employees, subcontractors, unions and many other stakeholders, not least the media to transgressions now that operations have restarted. In any event, following the rules has severely impacted all aspects of site work, reducing efficiency and slowing progress.

Labour and skill shortages were an issue before the virus struck; they have been made worse now by persistent absences through illness or self-isolation. Now that the first tentative steps are being taken to exit lockdown, a new problem is plaguing city sites which cannot facilitate parking. For example, how will staff get to work in Central London if TfL imposes strict social distancing, estimated to reduce the public transport capacity by 90%? Given the equipment they often carry, are they seriously expected to cycle or walk miles before and then after a physically draining shift?

The supply chain is patchy at best. Many manufacturing sites have furloughed their production staff and temporarily shut down. Work at one high profile sporting venue was only able to continue after high level client pressure managed to get a factory reopened to ensure that sufficient concrete was available from a single source so that the whole structure had uniform colouring. For a while, stocks of certain materials were restricted for use only on the creation of the Nightingale Hospitals. Fortunately, this impediment has now ended, but a lack of timely and reliable supplies is causing yet more delays to contract progress.

Contracts, delays and penalties

These delays are the core problem and major threat to contractors and the many others whose businesses rely on them. Contractors bound by JCT contracts face penalties for late completion, with no certainty that they can invoke the ‘force majeure’ concept based on the declaration of a pandemic as a trigger for the extension of time provisions. The legal principle has yet to be tested for a JCT contract, nor has the JCT issued any guidance on the point. The last thing a sector built on wafer-thin margins and tight cashflow can withstand is a flood of liquidated damages claims. Even if delayed completion can be mutually agreed on this basis, contractors will not be able recover their additional costs caused by the pandemic because a force majeure event is stated to be cost-neutral on the basis that it was nobody’s fault.

Thankfully, RICS has created a ‘conflict avoidance pledge’, which has been backed by the Construction Leadership Council and a wide range of major industry organisations. The intention is to encourage collaborative working and early intervention techniques to resolve issues before they become formal disputes.

Surviving the crisis

Sadly, not all the players in construction can survive this crisis, but with goodwill on the part of its many stakeholders the damage can be mitigated. Even before this crisis, the industry had the unenviable distinction of suffering 19% of all UK insolvencies, despite only contributing 6% of the nation’s GDP. This must not be allowed to escalate. Thankfully, the situation may just be starting to ease, but from a dangerous low point and with a long and bumpy road ahead.

The contractors who come through this and who will thrive in the ‘new normal’ will be those who maintain good relationships with their key stakeholders and communicate openly and honestly with them. They will also be the ones who pay their subcontractors and suppliers despite cash constraints, because without your supply chain you will not have a business, no matter how strong your new order pipeline is. Finally, they will be the ones who treat their employees fairly because without their trust and commitment, you have no future. All of your stakeholders are having a rough time in this crisis; they will have long memories of who were the good guys and who were the ones who tried to take advantage of the crisis for their own benefit by abusing others.