A shutdown of building sites to curb the spread of COVID-19 would trigger stoushes over up to $2 billion per month in an industry that employs one million people, as contractors seek damages for site delays and clients make their own demands for damages to cover costs of projects not completed on time.
The closure of all commercial and infrastructure project sites – with an estimated value of $165 billion this year – could trigger monthly claims worth between $1 billion and $2 billion by builders against their clients and claims against those contractors, quantity surveying firm Slattery estimates.
Commonwealth government limits on gatherings of people currently exclude building sites, along with locations such as shopping centres, prisons and mining sites as they are deemed to serve essential activities. Unions and some building industry employer groups argue that sites can be kept open safely and the industry argues it should be deemed essential.
But building sites could well be closed in successive tightening – Victoria could move to stage three restrictions as early as Thursday – and many contracts are vague about whether a pandemic could trigger the force majeure clause needed to trigger delay claims.
Each dispute would likely end in a negotiated balance of claims by each side, Slattery director Mark Pickerill said.
“It’s fairly likely the government will turn around and say all building sites will have to be shut,” said Mr Pickerill, who calculated the damages costs based on a sample of 40 projects it then applied to the whole industry.
By itself, such a move would benefit contractors.
“That’s probably in the builders’ favour,” Mr Pickerill said. “They could argue it’s a legislative instruction, so it’s more likely to be the clients’ problem than the builder claiming force majeure. But that will depend on every contract.”
For builders, their success in claiming delay damages depends partly on the type of project. The so-called GC-21 standard contract used for government infrastructure projects actually put more risk of delays onto the client, Mr Pickerill said.
“GC-21 actually states a pandemic or epidemic is a risk on the side of a client,” he said. “So in theory, if they get delayed, the builder has the right to claim money for delay.”
The standard contract used for commercial construction contains no such stipulation, however, making the definition of a pandemic more fraught.
“A lot of builders will be notifying clients saying ‘we’ve been hit by force majeure’ but it doesn’t fully define pandemic or epidemic,” he said.
Many commercial developers don’t have the deep pockets to pay delay claims, and will themselves be pushing for liquidated damages to cover the costs they face of not being able to complete and settle projects.
“If you’re an apartment developer – a lot of those people don’t have a lot of money in the bank,” Mr Pickerill said.
“They might not have any choice but to claim liquidated damages just to stay alive.”
Cancellation isn’t the only risk for builders. Staggering on-site workforces or having fewer people on site as parents stay home to look after children not at school will slow building schedules, leaving builders open to claims of liquidated damages.
Industry body Master Builders Australia has asked government clients to set an example by not pressing for liquidated damages in such cases.
“If clients including developers take commercial advantage of the impact of COVID-19 it will devastate the industry and the national economy,” MBA chief executive Denita Wawn said.
“Master Builders has called on the federal government to urgently announce that they will not pursue liquidated damages in Commonwealth contracts due to impacts of COVID-19 and that they send a strong signal to private clients that they should follow their example.”
The claims builders face only relate to contractual terms and don’t take into account the other costs such as labour and plant costs on site.
“If you’ve got a $100 million office building and finish a month late because of this, as a builder you’ve got to take not only the hit of your own costs, but you’ve got to take the hit that the client will have liquidated damages,” Mr Pickerill said.
Most contracts put a cap of 5 per cent of construction cost on liquidated damages, meaning a $100 million project with a specified liquidated damages figure of $1 million per month would only allow a builder to pay the client for five months.
“Most clients will accept that limitation,” Mr Pickerill said.
Subcontractors working for head builders have less protection, however.
“The subs who work for builders limit their liquidated damages but it tends to be much higher figures,” Mr Pickerill said. ” It can be anything from 10-25 per cent. I suspect some of them are already going broke.”
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