COVID-19: Mitigating financial losses during construction site shut downs

26.03.20

In a press conference on 23 March, Scotland's First Minister advised that building sites should close as part of the efforts to contain the spread of COVID-19, while the UK Government has not ordered the closure of any sites and is instead ordering construction companies to apply the "two metre rule".

In recognition of the practical difficulties in maintaining this rule on sites and the wider instruction to take all necessary measures to stop the spread, a number of major contractors have closed their sites. 

If you are a contractor and your construction project has closed or is at risk of closure, here are some practical tips to mitigate your losses and reduce financial exposure.

 

Serve notices

Establish the basis upon which you are leaving your site. Ideally, try to reach agreement that the project has been suspended and the terms of suspension. The employer may welcome this approach because it gives them certainty on the status of the contract and the financial consequences.

If the contract requires the service of early warning notices, notices of delay, or notification of compensation events, then be sure to serve them in accordance with the terms of the contract. Leaving site without being aware of the legal consequence of doing so gives scope for disputes when the site re-opens.

This could include exposure to delay damages. The same guidance applies to sub-contractors. It is best to reach agreement down the contractual chain. 


Site security and safety 

Put measures in place to secure the site during shut down. Are additional security measures required to reflect sites being closed for longer periods that usual? Will structures be stable and works protected during shut down?  
 

Financial recovery during shut down 

Shutting down does not mean a contract has come to an end. Contractors and sub-contractors are still entitled to apply for payment and will face a disruption to their project budgets, especially if they are relying upon relevant events which give an entitlement to more time, but no money.

Seek advice if you are not sure whether the contract entitles you to claim loss & expense. In particular, check whether the contract contains any conditions that must be complied with as a precondition to entitlement; for example, the NEC3/4 contract has strict timescales for notifying a compensation event. Failure to comply normally means no entitlement to additional time or money. 

Although works are not ongoing, you should still be able to claim for ongoing preliminaries, such as the cost of site welfare, insurance, managerial staff and site security.

Arguably plant hire costs would be recoverable, subject to any obligation to mitigate loss. If you are entitled to payment of loss and expense, the cost of labour could be recoverable, subject to the terms of the contract. Ensure that adequate vouching is kept of all losses suffered.  


Maintain accurate records

Compile evidence of progress on site and the condition of the works and site at closure.  


Continue to administer the payment process

Those administering contracts need to be especially vigilant during these times and ensure that any payment applications are made and responded to with the required payment notices and/or pay less notices. 

Contract administrators should also put in place measures to ensure that payment applications are safely received. The majority of payment applications will be received by email, but your contract may permit or require issue by post.If your office is closed, ensure you notify your supply chain of this and agree alternative means of issuing all communications, not just payment applications. 

 

Insurance 

Do you have insurance policies that react to any of the circumstances of site shut down? If so, there will likely be strict notification procedures that must be followed in order for the insurer to consider your claim. If you are responsible for insuring the site during the works, you will likely have to notify your insurer of a site shut down in any event.  

 

Preparing for restart 

It is not known how long the current situation will last, but consideration still needs to be given to how works will restart on-site once it is safe to do so. If you halt plant hire, will it be available for re-hire when the sites open? What materials do you have available for restart?

It is foreseeable that once works restart, all contractors will be seeking plant, labour, and materials at the same time. Will the employer agree to forward fund the purchase of important items, perhaps with a vesting agreement to protect it from the risk of contractor insolvency?  

 

Communicate with employers and sub-contractors now, not later

Start a dialogue with your employer and sub-contractors now, to agree a way to deal with the impact of a site shut down, but also plan ahead for the works restarting. Leaving site without certainty about the legal basis upon which you are doing so involves considerable risk. When parties return to site in the future there will be significant scope for disputes if action is not taken now.

It's really important to check your contract and seek legal advice if necessary.