24 April 2020
Risk management tips for construction contractors
Construction will be one of the first sectors to reopen as New Zealand moves to Alert Level 3.
For new construction contracts being entered into, we have compiled practical considerations for contractors to adequately manage the risks and issues that Covid-19 raises.
Contractors must review all the potential impacts when determining a price and proposed schedule for proposed work, especially if the contractor will be providing a fixed price (for the entire project or for unit prices) with set completion dates.
Critical considerations when entering contracts
Contractors must review the proposed contract form from the Principal and analyse how impacts are dealt with in the language of the contract. Before a tender is closing, it is critical for contractors to ask the principal (or their representative) the right questions in order to have clarity on how the principal and contractor will move forward if an impact occurs.
Some of these questions might be:
- What happens to the project schedule if the Government reinstates lockdown and the site is forced to close? Does the contractor receive any compensation for this delay to protect the project site?
- What happens if required materials are delayed due to manufacturers and/or distributors being unable to produce or deliver?
- What happens if too many people become ill and makes required labour impossible to procure?
- How can a contractor provide updated schedules if subcontractors and suppliers are unable to provide the necessary information with respect to the current circumstances?
- Will the contractor be compensated for the additional project management time to continually re-assess and reschedule the project more than normal?
- What if workers fail to show up to work due to fear of the virus spreading or notice of a confirmed case on the project site?
- What if equipment or repairs and parts from dealers or manufacturers are unavailable?
- What if critical services to the site are interrupted such as cleaning crews, sanitation and waste services?
- And in the worst-case scenario, what happens if the event of sickness or death of a key project member for any party (principal, contractor or designers)?
The best protection for a contractor is in the contract form. Most standard contracts have provisions to deal with change that can lead to delays, such as unforeseeable circumstances in NZS 3910.
Pricing the work
Even if a contractor gets answers to all the questions, do not assume that cost increases due to the impacts of Covid-19 will be covered by others. Therefore, contractors should be considering:
- The cash flow needs of the project - Contractors should consider that certain receivables may be delayed for payment.
- Extended duration of projects - Contractors should consider increased overheads including construction loan financing, insurance premiums and other general project costs.
- Site security and project protection costs - What is the impact on cost if the site is shut down?
- Labour cost – Will this increase due to scarcity of qualified people?
- Material costs - These may increase due to increased shipping costs, manufacturing reductions/backlogs and raw material unavailability.
- Subcontractors and key suppliers – Some may default so remember to consider the performance security measures.
- Health and safety costs – To effectively manage compliance these costs will likely increase.
During the work
Good communication between all parties is essential to minimise any impacts – this is always true but especially relevant in the current climate.
Additionally items to think about are:
- Organising and documenting communication as well as the status of the project constantly including project schedule updates.
- Any verbal discussions should be confirmed by email. Where possible contractors should consider adding an additional project-specific email address (with access by key employees) to copy correspondence sent by individuals in order to document chronologically and manage the challenge of people working remotely.
- Photographs and videos of site conditions should be produced regularly and especially as issues arise (including potential lack of productivity due to the limits of social distancing). Ensure they are dated, include proper descriptions for future reference and save to a company server that is backed up regularly.
- Remote project surveillance is something becoming more available for live feeds of the site and to document the status of work over its duration.
- Site personnel must be diligent at maintaining a project site diary daily. Entries should be made multiple times during the day so the multitude of issues that may arise in a day do not get missed.
- Project schedules should be updated more regularly and even informally (such as using two week look-ahead by work area ) but should still tie back to the overall master schedule to support future impact on any claims.
- Contractors must also consider heightened health and safety protocols as recommended by the Government.
- Back up project records and make sure these are not stored on standalone company computer or home computers.
- Consider using document sharing services to collaborate on issues.
All parties in a construction project must work together to meet the complexities that Covid-19 will add to the already challenging construction environment. Parties must recognise this and openly discuss the existing and potential future challenges, as well as fairly distributing potential impact costs. Those that do will likely be the ones who have fruitful long-term partnerships.
We’re here to help
One of our core responsibilities as a broker is to ensure you have all the information you need to make informed decisions about the risks your business faces. With the effects of coronavirus being felt in a number of ways by our clients across the country, we wanted to share some proactive advice to help you protect your business during this difficult and unprecedented time. We hope you find the information above helpful, if you have any questions or if you would like to speak to us about construction insurance, please contact a broker.