COVID-19 and construction: key contractual measures to aid parties involved in site closures or project delays

30.03.20

The COVID-19 outbreak is causing significant disruption to construction projects across the UK. We are speaking to clients on a daily basis about additional contractual mechanisms that can be put in place to ensure momentum continues on projects - on and off site - and to improve cash flow through the supply chain. 

The following are key documents that can assist parties in keeping their projects on track in the coming months:

 

Letters of intent and pre-construction services agreements 

For those employers whose projects are not yet at the construction on site phase, there are short term contractual measures that can be put in place to engage specific works, secure contractor pricing and, in so far as possible, the intended programme, without having to enter into a full build contract. 

 

Letters of intent

A letter of intent can act as a 'letter of comfort' which may constitute an interim contract governing the parties’ relationship until a formal build contract is signed. We typically draft these for clients where most of the contract terms and particulars for a project are agreed, including the contract sum and general scope of works.  

Although it is unlikely that works for any project will commence on site in the coming weeks, letters of Intent can still be used to instruct off site activities, such as the progression of design, ordering of long lead items and the engagement of key sub-contractors, leaving any "start on site" date to be agreed.

The employer will typically have a financial exposure under the letter for the instructed works, up to a specified cap. While the scope and terms of a letter of intent can be extended (and often are), these letters should still be viewed as interim contracts and not substitutions for a formal build contract. 

 

Pre-construction services agreements 

Pre-construction services agreements are commonly used as part of a two-stage tendering procedure, which aims to involve a contractor at an earlier stage of the design and construction process. These can be used to engage a contractor to assist in the design process or to advise on a wide range of pre-construction matters including, for example; buildability, programming, construction risk, works packages and interface issues and the use of specialist contractors - all with a view to working up a fixed or target cost.  It is possible that many employers embarking upon construction projects in the coming months may adopt a two-stage approach. 

Read here for more information about letters of intent and pre-construction services agreements. 

 

Off-site materials agreements 

Off-site materials agreements (OSMAs) can be considered for projects where goods and materials are being ordered and paid for by the employer, but will be manufactured and stored off site. OSMAs will ensure title vests in the employer upon payment, rather than upon delivery to site (which is the position under Scots Law).  

OSMAs can be an important means of ensuring cashflow down the supply chain.  In addition to title transfer to the employer upon payment, they will often include provisions dealing with responsibility for risk of damage and destruction to goods and materials while off-site, as well as insurance. 

 

Formal supplemental agreements 

Where construction projects are ongoing and build contracts have already been entered into, parties will have to consider the extent to which any amendments are required to the terms of the build contract, as a result of the COVID-19 pandemic.

Amendments might include extensions or alterations to the date(s) for completion of the works or changes to the contract sum and/or the method or means of carrying out the works. Once the parties are in agreement on such amendments, these should be clearly set out in writing, by way of a formal supplemental agreement to the original build contract, and executed by all parties.

Key amendments to terms of a build contract should not be agreed informally, or by e-mail. A formal agreement carefully drafted to record agreed principles will ensure there is no scope for either party to unpick the terms at a later point.