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Perspectives

Come together: Why it’s better to collaborate, not terminate, in the age of Covid

3 July 2020 | By Stuart Appelbe and Stephen Lee | 1 Comment

Many countries entered lockdown in March as the pandemic gathered pace, triggering a pause in construction projects.

We believe July could be a defining month because it will mark the end of the two-to-three-month project suspension period provided for in un-amended standard forms of FIDIC, JCT and NEC contracts.

That means it will be decision time for project owners and contractors, who will weigh up whether to trigger termination clauses following the suspension period, or, as we would advise, renegotiate contracts collaboratively to get the work done and protect investments already made in projects.

Lawyering up

Here is what we are seeing right now.

Covid-19 changed many things, but it has not increased the speed of litigation, or reduced its cost

The industry is already taking legal advice on each of the several causes of disruption and delay linked to the Covid-19 period.
Projects that were being well managed and were likely to close without dispute are now heading towards conflict.

Some clients are refusing to engage and accept that Covid-19 is a force majeure event.

Contractors are claiming that productivity losses result from a change in law rather than force majeure, and that increases in prelims are ways to mitigate force majeure delays.

The sector is “lawyering up”.

This will result in litigation and insolvencies. It might lead to a consolidation of the industry.

We need some early test cases to remove the uncertainty that contract administrators face. This might stop some of the posturing we see among parties, and prevent cash getting tied up in litigation and liability reserves.

But until then, unless the sector embraces a collaborative approach, the number of disputes can only increase.

If you walk, where will you go?

Contractors may be tempted to use the end of the suspension period to walk away from unprofitable projects.

They will be watching anxiously as costs pile up amid Covid-related delays, and feel they’re in a losing position as new safety protocols make it harder to reach contractual deadlines.

But we urge them to think: if you terminate this contract, what will take its place? Will losses from unabsorbed overheads and/or resizing the business be just as great?

Governments may invest in infrastructure to build their way out of recession, but we don’t yet know what the long-term economic effect of the pandemic will be.

The private sector may delay or cancel projects. Work is likely to be harder to come by, and competition for what contracts there are will intensify.

Nor is termination straightforward. The project owner can fight back, seeking recompense by arguing that the contract was wrongfully terminated through ambiguity in the clause, or that Covid-19 did not lead to entitlement, or that the contractor failed to comply with conditions precedent.

If that happens, you’re in litigation territory.

Demob costs

For their part, project owners may see an opportunity to remove contractors they feel are performing below par.
But do they really want to let a contractor walk away?

Unless the owner feels the project is no longer viable in the current climate, and it can afford to leave value tied up in an unfinished project, it will surely want to press on to completion to realise the full value, even if at reduced levels of return.

Plus, if a contractor terminates under FIDIC and NEC, it is entitled to payment for work completed, and demobilisation costs.

A new contractor will take time to procure and it will price in the disruption and reduced productivity ahead caused by Covid safety protocols, so either way it seems the project owner will be hit with higher costs.

Some may feel that the right way forward is to fight for everything.

For some, this decision will be driven by personality. Others may feel it is the only way the organisation can survive. As a result, they will take contractual positions that try to maximise the potential reward, and go down the “everyone for themselves” road.

But try to remember that litigation and arbitration are costly, time-consuming and uncertain.

Covid-19 changed many things, but it has not increased the speed of litigation, or reduced its cost. Given the cash flow and revenue pressures almost all businesses are facing, is this a good use of resources?

Reset to get back on track

The right route forward will vary case by case, but we urge owners in particular to be open to the benefits of a contract “reset”, driven by a shared objective to complete the job to the expected standards, but with a realistic assessment of what is possible in the age of coronavirus.

Rather than triggering an end to a project, parties should consider the chance to rebalance the contract, reset the success criteria and increase its deliverability.

Here are six things developers can do to keep contractors on side and keep projects on track:

  • Talk to them: Proactive dialogue is key. Understand that you are in a symbiotic relationship, reliant on each other to deliver the most successful outcome possible.
  • Make a proper financial assessment: Assess the cost to you of the contractor terminating, and explore the benefits of renegotiating the contract.
  • Go open book: Rather than guessing what the future achievable productivity is, or whether there will be a second wave of the virus, consider reducing contract administration teams and moving to an open book, cost plus arrangement for the remaining works.
  • Rethink the project: It may no longer be viable in its original form. Is a value engineering period required? Can the project be split into phases? Should it be mothballed until the market demand is more certain and cost of construction starts to return to old productivity norms? Successful value engineering requires a motivated and engaged contractor and engineering team.
  • Pay them: On live contracts, cash flow is currently a prime concern for contractors and this can be eased by negotiating more timely payment terms, releasing retentions and reducing performance bonds.
  • Work together honestly: Developers and contractors should agree what evidence is required to value claims and facilitate quick valuation, agreement and payment. Including increasing the level of detail of record keeping to allow the isolation of cost from the multiple concurrent causes.

The outcome of any reset negotiations may result in pain to both parties, and should be handled wisely. If they are, the pain should be less than it otherwise might have been.

But the resulting increased certainty and avoidance of disputes will surely outweigh that pain.

  • Stuart Appelbe is partner and Stephen Lee is senior manager at Accuracy, a multidisciplinary consultancy.

Image courtesy of Brooklyn/Unsplash