The Tsunami Facing Construction
One definition of a Tsunami is:- “an arrival or occurrence of something in overwhelming quantities or amounts”.
That definition is a relatively neutral one, but most of us link the term with a destructive force that causes unforeseen and often sudden damage and destruction to lives and property. In living memory, the 2004 Asian tsunami caused catastrophic damage to property and more importantly, over two hundred thousand people lost their lives.
In 2011 a Tsunami triggered by an earthquake struck the Pacific coast of Japan, causing around 20,000 deaths and damaged the Fukushima nuclear power station that caused extensive radioactive leakage. Most if not all of the local population were evacuated.
For the last two years the world experienced an arrival or occurrence of something in overwhelming quantities or amounts. It was called COVID that is estimated to have caused over 6 million deaths and caused havoc to many industries and businesses, including construction.
In our construction world, there is a further potential Tsunami approaching that may cause immense damage to the industry and to projects worldwide.
The current invasion by Russia in Ukraine is very obviously a catastrophic and horrific event for the people in Ukraine and may yet have unforeseen consequences. We can all but hope that the war will end soon, and that the destruction of a country and the killing of innocent people will stop.
Apart from the condemnation of the deaths of Ukrainian people, part of the reaction of the free world is to try to wean themselves off of, or at least limit, the use of Russian oil and gas. That in itself may well have severe consequences on energy supplies and costs far removed from the current conflict.
Even before the events in Ukraine, there was a global problem with energy supplies and prices.
By way of example, before the Russian invasion, the UK Forward Delivery Gas and Electricity Contract between July and late December 2021 indicated a 39.5 percent year on year increase. The prices of heating oil more than doubled, experiencing a 144 percent jump; motor fuel rose over 47 percent, and natural gas climbed 42 percent.
Countries are being encouraged to wean themselves off energy supplies from Russia, although there are concerns that such an embargo would cause enormous problems. Given the current increase and potential shortages in energy supplies, exacerbated by the consequences of the war in Ukraine, it is likely that energy prices and potential shortages may well increase further and will have an effect on raw material and manufactured goods, prices, and deliveries. Problems with energy supplies would trigger delays and cause unforeseen increased costs on material supplies and ultimately construction projects.
In China, it was reported recently that the COVID lockdowns in Shanghai and other Chinese cities existing today will continue to have an effect on construction projects, as China produces a great deal of construction related goods and equipment.
Another report advised that one in five container ships remain stuck in ports worldwide and 30 percent of the backlog emanates from China. The potential effects of shipping backlogs will potentially drive up material supply costs; impact on material deliveries with consequential effects on project programmes.
At the risk of being seen to be alarmist, all the signs, are that coupled with energy costs increases, there is a definite spike in material supply costs. Together with the delays to supply chains, these factors are already having an adverse effect of construction progress and costs. The longer that the current crises continue, the worse it will become.
A report published a couple of years ago, assessed that the supply of construction related materials accounts for some 8% of overall worldwide industry and that must include transportation costs.
Our advice to contractors and to employers alike is that the issues ought to be examined and addressed now to avoid problems occurring in the coming months.
Employers and their consultants should also recognise the importance of fair contracts removing as many potentially damaging risks as possible.
Looking forward, tendering contractors will need to be very careful and ensure that contracts contain sufficient safeguards to protect them from material shortages and delays; price increases and the combined potential effect on contract completions and profitability.
Contractors already working on existing contracts may well be facing the problems of those unexpected price increases; delayed material deliveries and shortages. Such problems may well be exacerbated by current events including increases in energy prices and given the European dependency on Russian oil and gas, potentially even more shortages, and delays yet to unfold.
This potential tsunami of additional costs may, to some extent, be COVID related, Ukraine war related, or related to a much disturbed international supply chain and a worldwide downward trend in economic wellbeing. Whatever the reason, their incidence, interaction, and cumulative impact will potentially have a devastating effect on the international construction industry, especially for Contractors, their suppliers and subcontractors with the future looking more fraught.
The effect of these measures has had a negative impact on both progress and productivity exposing Contractors to previously unforeseen additional costs. The issues identified above, may well cause further substantial increases in energy prices and potential energy shortages all of which may affect material deliveries and ultimately the costs of construction.
Contractors instructed to carry our changes and variations to the original contract designs or materials selections would be well advised to check thoroughly the current situation on material delivery times, prices, and manufacturers / suppliers terms and conditions on both issues.
International construction contracts allocate risk in different ways, and it may be that Contractors could be entitled to extensions of time and to recover some additional costs through the provisions relating to:-
- Changes in Law and / or
- Unforeseeable shortages in the availability of labour or materials
- Variations and/or
- Force Majeure
Our article entitled “The Real and Present Danger Facing the Construction Industry” contains advice regarding records to be maintained relative to the COVID situation and we re-iterate the importance of these as they now relate to the exposure to unforeseen additional costs. Records and Notices are pre-requisites in the successful prosecution of contractual claims, if Notice is not given in the manner, detail and time frames contained in the contract, the entitlements to time and money may well disappear.
Contracts also regularly require that claims be submitted either in their final format within a stipulated time frame or, in the case of ongoing events, via a monthly update.
It seems likely that the lingering effects of COVID and the pending tsunami of additional costs will prevail over a prolonged period and thus compliance with the contractual Claims procedure is of paramount importance.
Future Contracts
In tendering for new work the content of a pre-contract risk analysis ought perhaps to take on a different format and a different allocation and estimation of what the risks might be and how they should be considered financially. In making that estimation Contractors might consider reducing their risk exposure by addressing:-
- What materials might be better procured by the Employer.
- The inclusion of a schedule of cost indexes linked to a formula.
- How cash flow might be enhanced by proposing alternative time frames for certification and payment.
In making any determination we would encourage Engineers to act neutrally and encourage dialogue between the Employer and Contractor, treat claims for time and money as a matter of priority and with a degree of flexibility such that certifications and payments to the Contractor may be made expeditiously.
In respect of the current anticipated pricing increase and potential delay “Tsunami” facing the construction industry does not bode well for the immediate future particularly on existing contracts.
In summary there are not many good new stories arising from a Tsunami, except that I recall one that came out of the 2004 Tsunami disaster. It involved a Swedish lady called Karin Svard.
Everyone ran from the oncoming Tsunami except for Karin who ran towards it. The reason – her daughters were in the water, and she was running forward to save her children. Fortunately they all survived.
Our advice: –
Face the oncoming Tsunami and take action now.
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