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10/03/20

Coronavirus effects on Construction and Engineering Industry

Coronavirus effects on Construction and Engineering Industry

Coronavirus effects on the Construction and Engineering Industry

Some practical guidance

We have seen many articles recently highlighting the risk of Coronavirus (or COVID_19) on the construction industry and whether a Force Majeure Notice should be raised to protect the rights of the contracting parties.  With the number of reported confirmed cases of the virus on the rise on a daily basis and on a mass global scale, we will explore the options of how any potential impact to construction and engineering projects could be managed.        

What is Force Majeure?

One of the most common forms of Contract used in the Middle East today is the FIDIC Red Book 1999 Edition or an amended or similar version thereof.  The unamended version of FIDIC 1999 (Clause 19.1) describes Force Majeure as:

“an exceptional event or circumstance:

(a) which is beyond a Party's control,

(b) which such Party could not reasonably have provided against before entering into the Contract,

(c) which, having arisen, such Party could not reasonably have avoided or overcome, and

(d) which is not substantially attributable to the other Party.”

Is coronavirus a Force Majeure event?

We operate in a truly global marketplace with many products, equipment and components for construction and engineering projects being manufactured and shipped from all corners of the globe.  As the coronavirus has spread, three of the countries severely impacted include China, South Korea and Italy with many provinces being quarantined and locked down meaning production in many factories has slowed down or stopped altogether. 

In 2019, China produced 50% of the world’s steel, 56% of the world’s aluminium and 58% of all concrete products manufactured globally, with many of the products or biproducts being exported to the Middle East.  China is also a large exporter of many ‘finishes’ products as well as many MEP products and components, with 80% of the world’s Air Conditioning units being manufactured in China as an example.    

Italy is also a large manufacturing hub for the construction industry; in particular for stonework, with 16% of the world’s marble being processed in the country.  There are also several large lift and hoist manufacturers based in the Northern provinces, currently under quarantine with manufacturing outputs likely to be severely hampered.    

With travel restrictions now being implemented too, the freedom of movement for staff and labour resources across borders and continents is also being impeded, so the threat of a global pandemic is now having an impact on our industry in many ways, not just on the manufacturing of products.                 

Force Majeure or an Extension of Time? 

It could be contended that although the Coronavirus may meet the criteria of a Force Majeure event, under FIDIC 1999, an Extension of Time for Completion could be sought as an alternative further to Clause 8.4 which states:

“The Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to an extension of the Time for Completion if and to the extent that completion for the purposes of Sub-Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes:

…(d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions…”

Under either Clause, the obligation would be on the Contractor to prove that the Coronavirus epidemic had a direct effect on the critical path of the project programme, whether that be caused by shortages in Goods or personnel.            

Likelihood of Cost Recovery

Whether relief is sought under Force Majeure or via an Extension of Time, our belief is that recovery of Costs may be unlikely.  Further to Clause 19.4, in the event that Force Majeure prevents the Contractor from performing its obligations, recovery of Cost is only permissible in the occasion that the event occurs in the Country (of the Contract) and also relates to the causes listed in items 19.1 (ii to iv), such as civil war, terrorism, riot, munitions and the like.   

Although an Extension of Time for Completion could be awarded further to Clause 8.4, there is no further Clause or remedy under the Contract for the recuperation of Costs attributable to the delay caused by an epidemic.

Where contractors are seeking to recover cost, we would advise seeking appropriate legal opinion against the specific terms of the applicable contract.               

Minimising Delay and Reducing Your Cost Exposure

Many amended forms of Contract or governing laws impose a duty on the Contractor to mitigate delay and minimise potential losses for the Employer (although generally the standard FIDIC form does not pose such an obligation save for arising from a Force Majeure event).  If Force Majeure is claimed by the Contractor, or indeed by the Employer, there is a duty for both parties to minimise any delay. 

So, what can you do?  Our advice is to think practically:

  • Take Stock – Conduct a detailed review to understand whether you are being affected right now or is there a possibility you may be affected in the future?  Review your programmes to understand your progress.  What products and components do you still need to procure and or install? 
  • Source - Understand where your products come from.  Although you may have placed an order with a local company, the likelihood is that the products they provide (or components of) will be sourced internationally. 
  • Durations – Understand the lead in times for your products?  How long will they take to procure / manufacture / deliver?  Have any of these stages been impacted or are they likely to be?   
  • Dialogue – Hold constant dialogue with your supply chain for updates on your products / manufacturing slots / delivery schedules etc.  Where does your project sit in their priority list?  Is there anything you can do to move up the priority list?  Hold daily and weekly progress reviews to focus on your materials, equipment etc that may be impeded by any manufacturing or shipping delays.    
  • Alternatives - Can your products be sourced or purchased elsewhere from a country that is less affected?  Could you try an alternative supplier who may have stock resources?    
  • Specification - If your project is a Design and Build, the Contractor could propose an alternative specification.  If the Employer is responsible for the design, could a relaxation on the specification or an alternative design be sought and approved if delays will be reduced?   
  • Shipping – Could products be air freighted in lieu of sea freighting?  Could an alternative port of entry be used that may speed up delivery times?    
  • Contract – Review your Contract or Subcontract to understand what Clauses are applicable, what Clauses have been amended or deleted.  What can you claim for and what can you not?    

As Cost recovery from the Employer is likely to be problematical, if projects look like they will fall into delay caused by the effects of the Coronavirus, our advice for Contractors and Subcontractors is to seek to minimise their own Costs for any periods of delay and disruption they may incur by considering the following example measures:

  • Staff – Consider carefully travel bans and how they may affect staff availably if travelling abroad on leave or for business.
  • Labour – Monitor your labour productivity.  If production is likely to fall, labour resource should be managed to meet the outputs likely to be achieved for the materials available. This could also be relevant to non-effected works by introducing pacing of productivity to better manage costs.
  • Plant – Likewise with plant, any plant that is on standby or not being utilised should be off-hired.  If plant productivity is reduced, can numbers of machines be reduced?  
  • Subcontractors – As a large proportion of projects are Subcontracted, it is vital that progress is monitored for all Subcontractors, as delays caused by one, could impact on the Main Contractor and/or other Subcontractors.  If Works are likely to be delayed, could any of the Subcontractors be ‘stood down’ to minimise standing charges and disruption costs?  Can subcontractors who have not yet started, be postponed until they can progress with the required production?   
  • Bonds and Finance Costs – Ensure advance payment bonds are reduced to reflect the recovery achieved under the Contract thus far.         

Protecting Your Rights

If you feel that procurement, manufacturing or delivery of Goods will be impacted or if there is a possibility that labour resources could be reduced, it is vital that the correct notices are raised.  Under FIDIC, any Contractor’s Claim notice needs to be raised under Clause 20.1, so it is important that all the time periods are adhered to.     

This will mean (under an unamended form) any claim for an Extension to Time for Completion claim should be raised within 28 days of you becoming aware of the event, however if a Force Majeure Claim is sought, then this notice needs to be raised within 14 days of the party becoming aware that event constitutes Force Majeure.   

Records, records, records

For any potential claim to be successful, whether it be for an Extension of Time or Force Majeure, it is vital that the correct records are kept to support any claim.  These could include but not be limited to:

  • Daily, Weekly and Monthly Progress Reports and updates;
  • Daily Plant and Labour Records for all supply chain members;
  • Updated procurement schedules;
  • Updated programmes submitted to the Employer as per the Contract requirements;
  • Costs records of all mitigation attempts, such as air freighting receipts;
  • Cost records of all direct and indirect costs as a result of any delays;
  • All correspondence with the supply chain in relation to procurement, manufacturing and shipping of materials and Goods; and
  • Any correspondence in relation to any resource delays encountered.

For any support or further advice in relation to the contents of this article please contact any of our Middle East regional offices.

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