The Beginning of the End or the End of the Beginning?

It appears that Governments are slowly releasing the lockdown imposed upon its populations in an effort to contain the Coronavirus outbreaks.

In England and elsewhere in Europe, restrictions on movements of people are easing. However, in other parts of the UK, the restrictions remain in place for the time being. A key objective is to get all industry working profitably again and removing at least some pressure on the various economies. The US is moving towards that goal and our offices in Dubai report that restrictions may be easing there if only on a temporary basis. I understand however that restrictions remain in place in other countries in the Middle East. A relaxing of restrictions could be re-imposed locally or nationally depending upon the ongoing reduction or subsequent increase in new cases.

The question is, is this the beginning of the end of the struggles faced by the various affected industries, or the end of the beginning? Only time will tell. I cannot speak for other industries, but for the construction industry, the easing is, I hope, the beginning of the end of its woes.

This is perhaps the moment when Contractors need to think about setting out what their entitlement to additional time and / or additional payment will be on existing contracts.

Whether the problems experienced by the industry in various countries and the undoubted delays and high costs that have, and are being experienced, and will undoubtedly continue are compensable, are matters of contracts and perhaps also local laws. All Contractors would be well advised if they have not already done so, to take legal advice.

It is my understanding from others that in the UAE for example, Contractors have limited recourse for additional payment under UAE Law and they have no contractual right to payment under FIDIC 1999 and FIDIC 4th Edition. They may however be entitled to payment if the contract provides for it and / or due to exceptional circumstances and probably relief from liquidated damages. All depends on the contracts.

If that advice is correct, I would be very concerned for the general health of the industry there as a whole, and for Contractors caught between a major problem that was not of their making and a future that at best looks uncertain.

I stress however that I am not a lawyer and Contractors would be well advised to seek legal advice if they have not already done so.

For the future, (and I do mean the immediate future) perhaps those organisations that draft contracts may care to consider the implications and decide what to do for new contracts.

Assuming that relief is contractually available to a Contractor, then they would be well advised now if they have not already done so to start putting together their requests for more time, relief from liquidated damages and for additional payment for delay costs that are time related, and loss of productivity costs that are related to actual production.

Loss of Productivity costs are commonly called disruption, and the costs involved are quite different from the delay costs and need to be considered and calculated quite separately. It is important not to conflate the two different types of costs, they are quite unrelated. I addressed this issue some years ago in a Construction Law Journal article titled “Delay and Disruption – a Separable Duo”.

It is also important that Employers and their Consultants in the interests of the project, start thinking about how they are going to address the consequences of the pandemic.

It would be far more efficient if a consensual process takes place in order to define and quantify the consequences and, subject to the law and the contracts, discuss, negotiate, agree and pay the Contractors their entitlement and move on.

For the Contractors, I would advise an open book policy to give the Employers and those that advise them the confidence that they are not trying to take advantage of the situation.

Or, the parties can slug it out, inflict more damage on the industry and the projects and take the risk that Contractors will be unable to carry on.

If that happens, Employers will find out that the costs will increase exponentially when an incoming Contractor will not accept the inherent risks of the existing contracts (if they had any sense) nor the previous Contractor’s prices.

The alternative is for Employers and Contractors alike to show some sense and negotiate fairly to get the projects moving again.

Contractors should if they have not already done so, ensure that their records are brought up to date and sorted into a structured document with a request for payment.

On an ongoing basis it is clear that Contractors are still going to continue to work in an inefficient manner and they will potentially be losing money on their contracts in continuance. If that occurs, then Contractors ought to maintain the necessary records and hopefully, dialogue and cooperation will continue.

As a brief advice there are two quite distinct and very different forms of cost records that will be required. They are: –

1. Indirect Costs (Site Overheads and Time Related Costs)

These include costs of temporary accommodation including running costs of the site set up and includes management, supervisory staff, and indirect labour and equipment related to the ongoing maintenance of the project, as opposed to the physical construction.

If the contract period is extended, then the additional time of management and supervisory staff (prolongation costs) are relatively simple to document and check by comparing planned and actual times and costs and applying the weekly or daily costs to the periods of excusable delay.

2. Loss of Productivity Costs (Labour and Equipment Directly Involved in the Physical Construction Works)

These include what is commonly called direct (as opposed to indirect) cost of labour and equipment engaged in the physical construction of the project and the many component elements of it.

Going forward, it is likely that there will be ongoing delays and ongoing losses as manufactured goods and material deliveries will continue to be delayed. It is equally important that Contractors need to remain vigilant and on top of the situation. On some projects, in order to ensure safe working and maintain physical distancing between operatives, separate trades may be required to operate in different areas and / or there will be a limit on gang sizes. That may well lead to further delay and have a knock-on effect on productive working.

It is likely that even with a limited relaxation of the rules of lockdown, Contractors and Subcontractors will continue to face problems with material supplies; possible labour problems and increased costs of labour and equipment usage, i.e. they will face further delays and ongoing productivity losses.

By way of a simple example in the UAE, there are restricted numbers on labour transport buses. That will result in a possible doubling of buses to take the labour to the project sites with a subsequent increase in cost and / or less labour on site. The latter might result in loss of progress and potentially unproductive working.

Adequate, accurate and supported records will be increasingly important to record the physical progress and the effort required to achieve it in terms of labour and equipment hours expended.

Presentation of claims to Employers and their Consultants are very important. The information needs to be submitted in as much detail as possible in a comprehensible and comprehensive manner.

My advice to Contractors is submit the details using: –

• a brief narrative
• a summary
• detailed sub summaries
• refer to well catalogued and structured records that are open for inspection and checking.

Based on the advice of your Consultants or legal advisers present your claim in a logical, sensible manner to the Employers and or their representatives. Requests should be made for the Consultants to check the data. The Contractors in my opinion will have to offer an open book policy. Contractors will have to advise their Subcontractors to do precisely the same.

Subcontractors may well be on a pay when paid basis and their entitlement may be dependent upon the Contractor being paid.

Contractor’s ought to avoid exaggeration and hyperbole, simple language is better.

Remember the difficulties were not caused by the fault of the Employers, nor the Contractors or their Subcontractors.

Finally, at the end of the day having had a bitter, costly and expensive lesson, think about the future and think about how you were able to react and document and establish your entitlement.

If you have doubts about your own capabilities, do not hesitate to bring in Consultants to assist for the future and if required on the current matter.

As far as Employers are concerned if they have doubts about their ability to check, then consider a joint appointment of trusted people that could carry out an investigation for both parties and to be responsible and answerable to both parties.

Finally, I remember the very wise words of a Main Board Director of the company that I was working for in the Middle East who was brought in to decide on an informal basis a dispute that had arisen between two members of the Group (also noted in my article “Follow the Money” published a few years ago in the Construction Law Journal). I make no apologies for repeating it here and I quote.

The main board director was brought in. He listened to both of the companies for an hour, and I remember to this day reading his decision awarding payment of an amount from one company to the other. He wrote in a concluding paragraph: “That is my decision, and I trust that neither one of you is satisfied, because that is the sign of true compromise”.

Wise words and I have never forgotten them. There is a lesson for us all in compromise.

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