Managing commercial and financial impacts on construction projects

Whilst many sectors were forced to suspend their activities due to government action and social distancing measures, the implications for the Australian construction industry have varied from one construction project to another.

Some construction sites temporarily shut down as a precautionary measure to protect the health of  their workforce following an outbreak while other construction progress were impacted by the disruption of the supply chains and delays with distributors. Many construction projects were not affected at all. In the foreseeable future, we may see a regional “stop-start” of ongoing projects depending on the containment of COVID-19 around the country.

As a consequence, some construction projects may have been disrupted and project completion could be put at risk.  When it comes to project delays there are a number of commercial and financial considerations for principals and contractors to understand:

1.      What are the parties’ contractual obligations under such circumstances?

2.      Who is responsible for delays and cost-overruns?

3.      What remedies and recourses are available to the parties, both under the construction contract and insurance policies, in order to minimise any impact of delays on the business?

Insurance considerations

Whilst Marsh advocates through our claims specialists, we cannot always pre-determine whether a policy will or will not respond to claim, as insurers make those determinations. There may be uncertainty surrounding whether policies respond to specific events. Businesses should engage their brokers to establish what coverage is available under their policy and decide what is the best path moving forward.

Contractual considerations

Relevant clauses in the construction contract need to be considered and observed. These may include extension of time (EOT) clauses to allow the contractor a mechanism to delay the completion of a project, or liquidated damages (LD) clauses to agree upfront the financial damages payable due to events such as a project delay.

With EOT and LD clauses, principals and contractors need to be aware of their obligations to successfully trigger these clauses and meet their requirements such as notices, supporting evidences, expert specialists, if required, and time bar. Particular attention will need to be on the wording of the clauses to see if there are allowances for force majeure events, infectious diseases, government actions or other factors which may have led to delays.

Given there is no set wording for these clauses, the issues often require legal review and delay specialists to identify the contractual obligations, and measure delay.  

Due to the uncertainties created by this current climate with regards to insurance and contractual claims, now is an opportune time to obtain advices from delay specialists, gather the relevant information, forensically analyse delays, cost-overruns and acceleration measures, and facilitate open and amicable discussions to minimise impact on the business.

Contractual clauses for consideration:

• Extension of time entitlement.
• Time bar.
• Estimation of delay impact.
• Notification requirements.
• Open discussion with project stakeholder

Insurance policy wording for consideration:

• Pandemic / infectious or contagious disease extension.
• Cessation of works clauses, material fact reporting provisions, reasonable precautions conditions, progress reporting provisions etc.
• Exclusions.
• Applicable deductible.
• Applicable sub-limit.
• Notification requirements.

Financial considerations

Contractors are likely to face diminished revenues and difficulty collecting funds. To preserve capital and protect their solvency, construction companies must shift their focus to new priorities, including:

• Maximising liquidity to meet financial obligations.
• Identifying and monetising available assets quickly and efficiently.
• Communicating openly and regularly with financial stakeholders and project partners.
• Leveraging data to identify early warning signs of customer payment defaults.
• Holding discussions with peers to identify any additional unforeseen risks.

How Marsh Project Delay Specialists can assist principals and contractors

Marsh’s Project Delay Specialists regularly support clients with insurance and contractual claims preparation, unbiased delay investigation and avoidance advices. For example, our services include the data gathering and preparation of insurance (Delay in Start-Up) and contractual claims (LD and EOT), assessment of time impact for extension of time or contract re-negotiations. They can also assist with monitoring project delays and recommending mitigation measures to reduce future delay.

Contacts

If you have any queries, we invite you to contact one of your Marsh representatives or the following project delay specialists for a complimentary consultation.

Marsh Pty Ltd (ABN 86 004 651 512 AFS Licence No. 238983) arrange this insurance and are not the insurer. The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisors regarding specific coverage issues. All insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk.

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