Almost 18 months after the first COVID-19 lockdown in Australia,1 domestic construction projects are feeling the ongoing impact of supply chain shortages, cost escalation and shipping delays.
Australia's manufacturing sector has declined as a share of the overall economy over the last 30 years with the result that the construction industry is heavily reliant on off-shore materials, products and supplies.
As 2020 unfolded and the impacts of the pandemic began to bite, the main focus for contractors, developers and principals was three fold:
- identifying contract entitlements to recover time and costs in relation to delay caused by site shutdowns;2
- working to strengthen site safety and hygiene;3 and
- ensuring interrupted projects were completed as quickly as possible.
In 2021, there have been different challenges. Contracting parties who have worked hard to build the existing constraints on project delivery into their pricing, programming and planning4 are discovering that the global supply chain impacts are presenting an intractable problem, at least in the short term.
Contractors who have seen their projects delayed over the last year are understandably seeking to find ways to protect themselves. In turn, owners are seeking to protect themselves against the risk of a program being blown up by unpredictable shortages.
The challenges are manifesting themselves in a number of ways:
- contractors seeking an express right to recover any increase in ocean freight fees which have increased by some accounts by more than 50% due to a multitude of factors, ranging from a shipping container shortage, strong demand for domestic items as a result of global stay at home orders and competition from the US and Europe;
- for the first time in many years, we are seeing contractors ask for rise and fall provisions to be included in their contracts. In turn, contractors who bid for a job are finding their subcontractors are seeking to increase their costs in the period of time between tender submission and contract sum finalisation;5
- contractors seeking extensions of time for any delay in delivery caused by delays in international ports. This concern arises in part from recent issues in China, when ports in Shenzen and Ningbo were closed down due to COVID-19. Also widely reported has been an import timber shortage.6 Other ports, such as Los Angeles, have seen extensive delays in unloading and loading containers due to ongoing COVID-19 outbreaks amongst port workers; and
- extensive manufacturing delays, resulting in contractors seeking time and costs for delay in manufacturing and delivery of specific items, in particular timber,7 windows, steel products and doors.
How does one allocate or allow for the risk of these kinds of eventualities and still ensure some cost and time certainty? Whilst there is no perfect solution, some options for a principal to a construction contract include the following:
- agreeing to grant time for off shore (or domestic) supply chain delays. Any entitlement can apply to all supplies, or be limited to key items such as facades or windows;
- given the risk profile of a contractor seeking to recover its costs of such delay, one option is to agree to share the cost impact;
- requiring a contractor to demonstrate it has allowed a buffer or contingency in its program for key supply items. To the extent this can be done, any entitlement to recover time should not be triggered until the buffer has been exhausted;
- requiring a contractor to price the risk of this delay up front, and then fixing that cost. This will likely result in an overall increased cost but may provide some commercial certainty (although it will of course not eliminate delays).
- seeking to manage the risk of delivery delay by requiring a contractor to pay deposits for, or purchase, off-shore supply items earlier than usual. The risk to the principal can be managed in the usual way by the provision of bank guarantees against the advance payment and requiring the item to be secured and stored safely;8
- requiring a contractor to source more items locally, if
possible, noting the current domestic supply chain challenges as a
result of lockdowns in several states; and
- build in a process to 'value manage' the key materials or items post contract to explore current delays and identify whether substitutions can or should be made.
For those who draft contracts, it is necessary to consider:
- how supply chain delay is framed. For example, what proof needs to be provided by a contractor, or is there another benchmark which could be used;9
- whether the supply chain delay will be subject to a geographic constraint (for example, China) or limited to key items (such as facades or joinery); and
- how changes in law are framed, noting that most contracts do not allow for changes in law made by agencies or governments outside Australia.
To a large extent the impacts we are seeing cannot be eliminated by either party. Whether this is a long-term shift is yet to be seen but supply chain shortages obviously cannot be ignored today, nor for the foreseeable future.
1 12 March 2020. International borders were effectively closed by the Federal Government on 20 March 2020.
2 In most cases these claims took the form of a change in law claim or were made under a force majeure clause, if one existed in the project contract,
3 Resulting in industry agreed guidelines, for example those agreed by Victorian construction unions, and industry and employer bodies.
4 Driven by directives issued under public health legislation in each of the states and territories, relating to matters such as social distancing, wearing PPE, testing, screening and isolating positive COVID-19 cases.
5 The Master Builders Australia Survey report for June states the tightest supply pressure relates to bricklayers, carpenters, concreters, electricians and floor finishers
6 Demand for timber has in turn been affected by a local residential construction and renovation boom, and forest losses in the 2020 summer bushfires.
7 91% of the respondents to the MBA Survey indicated timber supply delays.
8 We understand some contractors are taking on additional warehousing facilities and storage areas to manage the additional items they are likely to have to store for longer periods.
9 For example by reference to controls imposed under the Cth Biosecurity Act 2015. In the case of off shore delays, consideration would need to be given to granting relief for shut down of manufacturing sites, or just ports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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