Covid-19 is not going away anytime soon. That's a fact we can all agree to.
The impact of the pandemic continues to wreak havoc on the construction industry. As business owners, you must ensure that you have in place plans, processes and strategies that effectively deal with the challenges that Covid-19 presents.
In this article, we will discuss:
- some of the challenges faced by the construction industry; and
- tips on how to weather these challenges and protect your profits.
Some of the immediate challenges experienced by the construction industry are:
- supply chain disruptions;
- shortages of building materials;
- increase in costs of building materials; and
- labour shortages.
These challenges are being caused by:
- a global surge in demand for building materials;
- increased demand for new home builds and renovations;
- pandemic driven global supply chain disruptions such as factory closures and container shipping delays; and
- more recently power supply shortages in China.
So, how do you bullet proof your business from Covid-19 challenges?
Protecting your Profits from Price Increases
Most building contracts are fixed price. This means that the builder is responsible for any costs above the agreed fixed price, unless there is a variation to the contract that results in a change to the agreed fix price.
In order to protect your business from price increases and supply chain disruptions, before you sign a contract, check that you can deliver in light of the impacts of Covid-19. Consider reviewing your contracts and including cost escalation and extension of time clauses. Cost escalation clauses and extension of time clauses accommodate increased building material costs in the overall pricing of a project and allow you to claim an extension of time due to the impacts of Covid-19.
Cost escalation clauses may not be permitted in some jurisdictions. In Queensland, the QBCC Act does not expressly prohibit a cost escalation clause. Having said that, cost escalation clauses in light of effects of Covid-19 have yet to be tested by the Queensland courts/tribunals. Accordingly, you should seek legal advice so as to ensure that any cost escalation clause is drafted carefully to be considered fair, transparent and therefore enforceable.
Safeguard your Business from Supply Chain Disruptions
In order for you to safeguard your business from supply chain disruptions, you must have a sound understanding of your supply chain. This will allow you to put in place measure to respond to supply chain issues well before they material impact a project.
Some practical tips you may wish to implement, include:
- building a stock pile of the building materials you regularly use that may be in short supply;
- if you know that a particular building material has been subject to long delays, you might work with project managers to factor these constraints and time delays into schedules, or develop contractual clauses that allow for time delays in sourcing such materials without penalty; and
- if you are experiencing delays with existing suppliers, you may benefit from reviewing your existing terms and conditions with the suppliers and considering your right to terminate contracts where the supply of materials is delayed and sourcing from elsewhere.
In summary, whilst the Covid-19 landscape has created a number of uncertainties in the building and construction industry, all is not lost. You can effectively navigate the challenges of the pandemic by making a few changes to your business model and more importantly, your contracts.