Not sharing Covid risks would threaten viability of construction projects

Out-Law Analysis | 01 Sep 2021 | 8:10 am | 3 min. read

The construction industry faces many challenges related to Covid-19, and if it doesn’t take a co-operative approach and share risks then it could make the situation even worse.

Contractors are likely to face shortages of people; shortages of materials, and delays due to further lockdowns or other government-imposed restrictions. If those sponsoring projects simply pass all risks on to contractors then projects will get bogged down in disputes and will face higher contingencies, meaning contingency payments which are set aside to cover unexpected costs.

The temptation for companies to place all the risks on contractors or to allow only limited extension of time or monetary relief is strong.

But that would force contractors to price in these risks, when pricing a risk such as Covid-19 accurately is impossible. Even if it was possible to price the risks, in doing so experienced contractors would simply price themselves out of the project, or else the company behind the project would end up paying for contingencies which may not materialise.

Companies must be innovative and cooperative when dealing with Covid-19 risks. Emphasis should be on being practical, pragmatic and responsive to the fast-changing nature of the pandemic.

Many contracts we see simply ignore Covid-19 altogether, or even if they do they deal with the impact of Covid-19 are based on ‘impossibility of performance’ of the contract, meaning a total shut down of a site. But Covid-19 is more likely to lead to a slowing down, rather than ceasing, of operations because of restrictions on movements or working hours.  Resilient contractors have adapted so they can continue working, but this means they cannot take advantage of strictly-interpreted Covid-19 clauses.

A strong handed approach of placing all the risks of Covid-19 on the contractor will be likely to result in disputes, particularly when contingencies are not sufficiently priced by contractors seeking to win a competitive tender.

Dealing fairly with risk

The impact of Covid-19 is so wide-ranging and unpredictable that the risks should not all fall on one party or the other. Instead, an even-handed approach should be taken when allocating the risk of Covid-19, one focused on innovation and collaboration.

Drafting Covid-19 clauses

When defining Covid-19 in a contract it is important to ensure that the description includes the mutations and variants of the disease, so as to cater for the ever changing nature of Covid-19.

From experience of addressing Covid-19 risks it has been more efficient to deal with those impacts in one comprehensive clause which overrides other clauses, rather than deal with it in individual clauses.

This forces parties to look at Covid-19 related risks holistically and allows planning around the likely scenarios and allocating or and sharing the risks in bespoke provisions.

It also avoids the difficulty of dealing, often inconsistently, with Covid-19 individually in many clauses throughout a contract.

Taking the FIDIC first edition set of model clauses as an example that could include:

  • Clause 8.4(d) in respect of unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions and the contractor’s entitlement to EOT;
  • Clause 8.5 in respect of delays caused by authorities and the contractor’s entitlement to EOT;
  • Clause 13.7 in respect of changes in law and the contractor’s entitlement to EOT and cost;
  • Clause 17.3 and 17.4 in respect of the employer’s risk and the contractor’s entitlement to EOT and cost; and
  • Clause 19 in respect of force majeure and the contractor’s entitlement to EOT and cost.

Allocating Covid-19 risk : Baselining the new normal

Risk allocation for unknown underground conditions are often allocated by baselining it according to Geotechnical Baselines Reports (GBR). There is no reason why this cannot be used to allocate risks for Covid-19, by identifying and agreeing a ‘baseline’ COVID-19 scenario, and basing compensation on any shift in the baseline. The compensation scheme is also often coupled with an excess/deductible approach, with only shifts beyond an agreed excess leading to compensation.

Reviews would then take place of what has been happening in relation to Covid-19 and parties would re-set those conditions, previously considered as abnormal before the pandemic began, as the new normal or the ‘baseline’.

However, it is important to note the ‘baseline’ for and foreseeability of Covid-19, are very different for the ‘baseline’ for a risk such as a change in law.  For a change in law, a specific base date might be appropriate such that any changes after that base date leads to compensation. For Covid-19 it would be too unpredictable to set such a base date, as the contractual allocation would fluctuate wildly, depending on whether at the base date, the parties were in lockdown mode or open mode.

It would make sense to assume that a contractor has allowed in its price for the effects of any aspect of the pandemic or government action that took place at a defined period of time before the base date.

The contract should also take account of conditions in any other country which could affect a site. For example if contractors or suppliers depend on vital supplies from a particular country then the contract should address delays or price increases related to outbreaks in that country. Such allocations are not commonly found in standard forms of contracts, but unusual conditions do require such innovative allocations. As such, it is important that companies be more innovative and cooperative when dealing with Covid-19 risks, so that a more balanced allocation of risks can be achieved and maintain the viability of construction projects.