The arrival of the Delta variant in New Zealand has created a number of new problems affecting the construction industry. The latter is due to the interregional differences in the warning levels. While Auckland will stay at Level 4 until at least 11:59 p.m. on Tuesday, September 14, the rest of New Zealand will move to Level 2 at 11:59 p.m. tonight.
Most of the country was able to resume construction projects in level 3, and a change to level 2 means that all projects in these areas can theoretically be put back into operation. This results in limited supplies of materials between regions, as the majority of domestically manufactured construction products are made in Auckland. This is problematic for the delivery of materials between Auckland and the rest of the country, as materials cannot be shipped from Auckland unless they are deemed “essential”.
What logistical and financial challenges does the construction industry face due to these alert level differences?
Impact on the supply chain
This is an unprecedented situation for New Zealand. For the first time we are dealing with the commercial capital of Auckland at level 4, while the rest of the country is at level 2. While the reasons for the government’s public health response are understood, the commercial implications are not believed nor fully explored.
Under COVID-19 Public Health Response Requirements (Warning Level Requirements) (No. 9) 2021 (Order), companies must close at Level 4 unless the company is a “Warning Level 4 Company or Service “And” works in accordance with “the requirements of warning level 4”. “Construction, construction and maintenance services” is one of the 30 exempted categories if those services are required for one or both of the following conditions:
- address immediate health and safety risks; and or
- for nationally important infrastructure.
“Nationally Important Infrastructure” means an infrastructure that enables or supports supply chains that are required for one or both of the following conditions:
- to meet the current needs of people and communities; and or
- to enable or support the recovery of all or part of New Zealand from the effects of COVID-19.
Another exception applies to any body with legal responsibility for the construction and resource permits required to enable the construction, construction and maintenance services. The website of the Ministry of Economy, Innovation and Employment (MBIE) offers constantly updated instructions on which construction works can and cannot be carried out on level 4, accessible here.
For the construction sector, this means that only projects or works can be carried out that support essential services, and supplies and trade can only be provided for those projects or works. This means that many of the Auckland-based suppliers and manufacturers are unable to deliver their goods and services to the rest of the country while Auckland remains at Level 4 unless the change is recorded. This is a cause for concern in the construction industry, where there is already a shortage of materials (due in part to the impact of delays in world trade / shipping that we discussed recently here). If Auckland stays longer in Level 4, there is a real risk that construction projects in the rest of the country will be significantly hindered by a lack of materials.
MBIE takes a rigorous approach to requests for an exemption for construction projects and work for level 4 operations and reviews each request against the criteria. Therefore, companies must critically examine their applications to MBIE for their chances of success. However, if there is a supply chain that is critical to ongoing construction, there is a broader authority to obtain an exemption from the Director General for Health under the Health Act of 1956, which could be exercised with the aim of making this a public response Health is.
Imminent change signals
To address concerns, the government announced today that it intends to manufacture some construction products in Auckland during the Covid-19 lockdown to support continued housing construction across New Zealand.
Although the ordinance has not yet been changed, the government has signaled that it will allow the manufacture and supply of plasterboard, gypsum plaster and coated roof steel from Auckland. This work must be carried out with the minimum number of safely required personnel and must be carried out in accordance with the rules of level 4. The change to the job to make this possible will be made in the next 48 hours and MBIE will liaise with the contractors authorized to do this work.
Contractual implications – whose risk is there in the contract?
For projects that are in the middle of completion, contractors affected by delivery delays should review the terms of the contract. The starting point is to consider whether they are eligible for reimbursement of the time and expenses incurred from level 4 in Auckland while the rest of the country was level 3 and then level 2 starting tonight. Determining the value of the claim will be complex and, depending on the terms of the contract, will likely require the contractors to demonstrate that all of the additional costs claimed were incurred by the fact that Auckland is in Level 4.
For those parties now negotiating contracts, it is important to consider what risk (both in terms of time and cost) a delay in the supply chain should pose and whether the contract should specifically address that risk or the standard Conditions are sufficient. When time is critical for a project, to reduce the risk of the impact of delivery delays, the parties could consider structuring the work so that the majority of the materials are delivered and / or manufactured on site before the work begins, rather than gradually during the project.
Where to from here
At this point it is difficult to estimate how long Auckland will stay in level 4.
It will be interesting to see how the regulation changes in relation to the problems facing the industry in both Auckland and the rest of the country. However, with the government firmly focused on the public health response, these practical and commercial issues will continue to affect the construction industry.