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Almost 18 months after the first COVID-19 lockdown in Australia1, domestic construction projects are feeling the lingering effects of supply chain bottlenecks, cost escalations and delivery delays.

Australia’s manufacturing share of the overall economy has declined over the past 30 years, which has left the construction industry heavily reliant on offshore materials, products and supplies.

As 2020 developed and the effects of the pandemic began to take hold, the focus for contractors, developers and builders was on three levels:

  • Determination of contractual claims for reimbursement of time and costs in connection with delays due to site closures; 2
  • work to improve site safety and hygiene; 3 and
  • ensure that interrupted projects are completed as quickly as possible.

There were various challenges in 2021. Parties that have worked hard to incorporate the existing project delivery constraints into their pricing, programming and planning4 find that the impact of the global supply chain is an intractable problem, at least in the short term.

Contractors whose projects have been delayed over the past year are understandably looking for ways to protect themselves. In return, the owners try to protect themselves against the risk of a program being blown up by unforeseen bottlenecks.

The challenges manifest themselves in several ways:

  • Contractors seeking an express right to reclaim any increase in ocean freight charges that has increased more than 50% due to a variety of factors including shipping container shortages, strong domestic item demand as a result of the worldwide fouling of house orders and competition the US and Europe;
  • For the first time in many years, we are seeing contractors requesting promotion and relegation provisions to be included in their contracts. Contractors who apply for a contract, in turn, find that their subcontractors are trying to increase their costs in the time between the submission of the offer and the conclusion of the contract amount; 5
  • Contractors who request extensions of deadlines for delays in delivery due to delays in international ports. This concern stems in part from recent issues in China when ports in Shenzen and Ningbo closed due to COVID-19. A shortage of imported timber has also been widely reported.6 Other ports, such as Los Angeles, have seen significant delays in unloading and loading containers among dock workers due to the ongoing COVID-19 outbreaks; and
  • significant delays in manufacturing, causing contractors to seek time and expense for delays in manufacturing and delivering certain items, particularly wood, 7 windows, steel products and doors.

How do you classify or take into account the risk of such eventualities and still create a certain cost and time security? While there is no perfect solution, some options for a builder for a construction contract include the following:

  • agree to allow time for delays in the offshore supply chain (or inland). Any claim can apply to all deliveries or be limited to essential items such as facades or windows;
  • Given the risk profile of a contractor seeking to offset the cost of such a delay, one option is to agree on how the costs will be shared;
  • require a contractor to prove that he has granted a buffer or a contingency for important delivery items in his program. As far as possible, entitlement to recovery time should not be triggered until the buffer is exhausted;
  • require a contractor to pre-price the risk of this delay and then determine those costs. This will likely result in an overall higher cost, but it can provide some commercial security (although it won’t eliminate delays, of course).
  • attempt to manage the risk of delivery delay by requiring a contractor to Make or buy down payments for offshore supplies earlier than usual. The risk for the client can be controlled in the usual way by providing bank guarantees against advance payment and the obligation to secure and safe storage of the item; 8
  • Require a contractor to source more items locally if possible, taking into account the current challenges in the domestic supply chain due to lockdowns in multiple states; and
  • incorporate a “value management” process for the key materials or items after the contract is signed, to investigate current delays and determine whether substitutions can or should be made.

For those drafting contracts, there are a few things to keep in mind:

  • how delays in the supply chain are represented. For example, what evidence needs to be provided by a contractor, or is there any other yardstick that could be used; 9
  • whether the delay in the supply chain is geographically restricted (e.g. China) or limited to key elements (e.g. facades or carpentry); and
  • how legislative amendments are worded, bearing in mind that most treaties do not allow legislative amendments by any agency or government outside of Australia.

Most of the effects that we are seeing cannot be removed by either party. Whether this is a long-term shift remains to be seen, but obviously supply chain bottlenecks cannot be ignored today and for the foreseeable future.

Footnotes

1 March 12, 2020. On March 20, 2020, the international borders were effectively closed by the federal government.

2 In most cases, these claims involved a right to change the law or a force majeure clause, if one existed in the project contract,

3 The result is industry-agreed guidelines, such as those agreed by the Victorian construction unions and industry and employers’ associations.

4 Powered by guidelines enacted under health laws in each of the states and territories regarding matters such as social distancing, wearing PPE, testing, screening, and isolating positive COVID-19 cases.

5 The June Master Builders Australia Survey report said bricklayers, carpenters, concrete workers, electricians and floor pavers are facing the tightest delivery pressures

6 The demand for wood was in turn influenced by a local housing construction and renovation boom as well as forest losses due to the summer fires in 2020.

7 91% of those questioned in the MBA survey indicated delays in delivery of wood.

8 We know that some contractors are setting up additional storage facilities and storage areas to manage the extra items they are likely to need to store for long periods of time.

9 For example, by referring to controls imposed under the Cth Biosecurity Act 2015. In the event of delays off the coast, consideration should be given to granting relief for the closure of production facilities or just ports.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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