Impact of COVID Shutdowns on Construction Contracts

With the recent COVID-related shutdowns of construction sites in NSW, four FAQs have arisen:

  • Can builders claim for Extensions of Time (EoTs)?
  • Can Liquidated Damages (LDs) still be applied?
  • Do the COVID shutdowns constitute a Force Majeure?
  • Does my construction insurance cover me for the consequences of a COVID-related delay?

MECON sought advice from construction solicitor, Jessica Rippon (Construction Legal Pty Ltd) to answer some of these questions for our clients.

Although complete shutdowns were not ordered with the first wave of COVID last year, some construction sites were impacted with reduced staff numbers on site, resulting in program slowdowns and extended completion dates. Accordingly, the questions addressed in this broadcast have previously been legally considered.

In short, unless there is a specific clause in a construction contract stating that an Extension of Time (EoT) can be claimed for a delay beyond the contractor’s reasonable control or for COVID specifically, there is a risk that a contractor cannot claim an EoT for COVID shutdowns or be exempt from related Liquidated Damages (LD’s).

Further, if your contract contains a Force Majeure clause, unless the clause specifies COVID/pandemic as a qualifying cause, then it is likely that COVID would not be considered a Force Majeure event. (Meaning you could not claim for EoT’s or be exempt from LDs).

It is recommended that contracts be amended using a three-step approach:

Step 1 – Add the following to the definition of “Delay Event” or “qualifying cause of delay” to your EoT claim clause:

  • COVID-19 means the respiratory virus or illness known as “COVID-19” or “severe acute respiratory syndrome coronavirus (SARS-CoV-2)” or “coronavirus”.
  • COVID-19 Related Event means any governmental direction, order or instruction issued in connection with COVID-19.

Step 2  – 
Amend the definition of ‘Force Majeure’ (if applicable) to include ‘COVID-19’ and ‘Covid-19 Related Event’ as above.

Step 3 –  Add a term to the contract to the effect that if a Force Majeure event (which includes COVID-19) lasts for more than three months, the contractor can elect to terminate the contract.  (Obviously, this is a drastic move but in these uncertain times, it is better to have the option than not).

The above amendments will allow the contractor to claim an EoT for COVID-19 impact and protect them from the application of LD’s for any delay in practical completion, provided of course that the contractor has complied with the time and notice requirements of the contract to claim for an EoT.

Does my construction insurance policy insure me  for the consequences of a COVID-related delay?
Such policies generally respond to physical loss or damage. COVID-related delays, and/or revenue-reduction, do not engage the policy trigger of physical loss or damage. Most construction policies also contain a “consequential loss” exclusion, excluding cover for consequential losses (including loss of revenue) from any cause – including COVID.

For those of you who missed our previous “Care Package” newsletter on how MECON will administer policy matters related to COVID, here it is repeated below:

Please read our proposed solutions carefully. All of the measures are subject to policy terms and conditions – and are applied at MECON’s discretion.

We trust this message finds you and your family well in this difficult time.

Construction policies

  1. For a single project policy, let us know if the insured project does not start on the commencement date shown in the schedule. We can simply move the commencement and completion (including defects liability period) dates forward. 
  2. Remember MECON’s construction policies allow up to 90 days cover after the owner accepts that the project is complete – if there is a provision for this in the construction contract . This means we will cover a completed risk for up to 90 days after construction has completed if contracts are amended to reflect this.
  3. Did you know that should the Government issue a stop-work on construction sites (meaning that there has been no work on site), cover will cease on the ‘Material Damage’ section of the policy under the “cessation of work” exclusion present in construction policies.  Most construction policies in the market cease cover after 30 days, however MECON’s “cessation of work” exclusion in its construction policies is 60 days – 30 days longer than most other policies in the market. This means cover will continue on such project sites for 60 days.  After this 60 day period there would be no cover for Fire, Accidental Damage, Burglary and/or Theft, Storm and so on – unless you speak to us and we agree to an extension.
  4. If a project site is completely shut down, unattended, and is secure from public entry and the Government has ordered shut-down, MECON will extend the liability section of Single Project policies for the duration of the Government shut-down at no additional cost.  (Note: Material Damage section premium cannot be adjusted as the ongoing risk is far greater)
  5. Subject to any minimum premium, we will allow premium adjustment rebates (for turnover-based policies) of up to 50% to allow for any reduction in turnover caused by Government-ordered shut-downs.
  6. In times of construction shut-down, it is likely that a higher value of materials destined for the project will be put into storage.  MECON’s is one of the few construction policies that does not sub-limit materials in storage.  Meaning our clients do not need to worry about their level of cover for materials in storage as it is included in their project value (which is also in accordance with the requirements of most Australian Standard contracts).

Contractors plant policies

  1. Should plant be laid up as a result of the Government orders, MECON can assist with a reduced cover and reduced premium option to assist for the static risk to plant whilst it is in the storage yard and waive any road risk premium altogether for the duration the plant is laid up.
  2. If your business is completely shut down because of Government orders, remember our liability policy only charges on the turnover of your business so your premium will effectively be reduced during shut-down period.

Remember your WHS and Safe Work obligations

Some very practical advice for employers and your obligations during the COVID-19 outbreak.

  • Contractors have obligations to prevent the spread of the coronavirus in the workforce for employee welfare and also in order to be compliant with your obligations under Work Health Safety (WHS) legislation.
  • Safe Work Australia has recognised that employers will not be able to entirely eliminate the risk of workers’ contracting coronavirus while carrying out work, but they must do all that is reasonably practicable to introduce appropriate control measures and communicate these measures to all workers.
  • It is possible that employees may have an entitlement to workers compensation if they contract coronavirus. For example, if the employment involves travel to an area with a known viral outbreak, activities that include engagement or interaction with people who have contracted the virus or activities that contravene Department of Health recommendations.

We hope this update has been helpful/informative and we thank you for your support and understanding as we work together to weather this challenge. As always, don’t hesitate to contact us if you have any questions or concerns.

By Glenn Ross – CEO

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Dear all Firstly a word to the wise: If you have been following the media relating to the construction industry, you will know that your clients