1.5 years into COVID-19, Australia’s domestic construction projects are feeling the ongoing impact of global supply chain shortages. In this Insight, Masco Group’s MD Abdul Majid explores the causes, implications and potential ways forward for the industry.
Challenges in the first wave of COVID-19’s Australian impact
The Australian construction sector is heavily dependent on global supply chains and off-shore sources of materials. Since the manufacturing sector declined as a share of the overall economy over the last 3 decades, the construction industry has looked overseas to source materials, products and supplies.
As the COVID-19 virus unfolded through 2020 and the impacts of the pandemic began to become clear, developers and contractors focused on the following priorities:
- Identifying contract entitlements to recover time and costs related to delays caused by site shutdowns;
- Working to strengthen site safety and hygiene;
- Ensuring interrupted projects were completed as quickly as possible after lockdowns ended.
In the more recent lockdowns in the winter of 2021, there have been different challenges.
Contracting parties who have managed to build existing constraints caused by COVID-19 into their project delivery, pricing and planning are discovering that global supply chain impacts are now presenting the biggest challenge of all, at least in the short term.
Contractors and builders who have seen their projects delayed over the last year are seeking to find ways to protect themselves. Owners and developers are seeking to protect themselves against the risk of a program being significantly impacted by unpredictable shortages.
Supply chain issues in the winter-2021 wave
Present challenges are manifesting themselves in a number of ways:
- Contractors and builders are seeking express rights to recover any increase in ocean freight fees (which have increased by some accounts by more than 50%) due to factors ranging from shipping container shortages, strong demand for domestic items as a result of global stay-at-home orders and competition from the US and Europe;
- For the first time in a long time, builders are asking for “rise and fall provisions” to be included in their contracts. In turn, these builders are finding that subcontractors are seeking to increase their costs in the period of time between tender submission and contract finalisation;
- Builders and sub/contractors are seeking extensions of time for any delay in delivery caused by delays in international ports. This concern arises in part from recent issues in China, when ports in Shenzen and Ningbo were closed down due to COVID-19. Also widely reported has been an import timber shortage. Other ports, such as Los Angeles, have seen extensive delays in unloading and loading containers due to ongoing COVID-19 outbreaks amongst port workers; and
- Extensive manufacturing delays, resulting in builders and sub/contractors seeking time and costs for delay in manufacturing and delivery of specific items, in particular timber, windows, steel products and doors.
Taken together, these are truly unprecedented times.
How does the construction sector deal with these unique problems for the first time on this scale in living memory?
A way forward: How the sector can move forward
While there is no perfect solution, some options include the following:
- Developers should agree to grant time for offshore supply chain delays. This can apply to all supplies or be limited to key items (e.g. facades or windows);
- Given the risk profile of a builder seeking to recover its costs of such delay, another option is to agree to share the cost impact between developers and contractors;
- Requiring a builder / contractor to demonstrate it has allowed a buffer or contingency in its program for key supply items. To the extent this can be done, any entitlement to recover time should not be triggered until the buffer has been exhausted;
- Requiring a builder / contractor to price the risk of this delay up front and fixing that cost. This will likely result in an overall increased cost but may provide some commercial certainty (although it will of course not eliminate delays);
- Seeking to manage the risk of delivery delay by requiring a builder / contractor to pay deposits for, or purchase, off-shore supply items earlier than usual. The risk to the develop or principal can be managed per usual through bank guarantees against the advance payment and requiring items be secured and stored safely;
- Requiring a contractor to source more items locally if possible, noting the current domestic supply chain challenges as a result of lockdowns as well;
- Build in a process to manage the key materials or items post-contract to explore current delays and identify whether substitutions can or should be made.
For lawyers and others who draft contracts, it is necessary to consider:
- How supply chain delay is characterised. What proof needs to be provided by a contractor, for instance?
- Whether the supply chain delay will be subject to a geographic constraint or to item categories (e.g. facades or joinery);
- How changes in law are framed, noting that most contracts do not allow for changes in law made by agencies or governments outside Australia.
We live in unprecedented times; times that require unprecedented cooperation and problem solving to solve for what are challenging issues most have never faced before, and are unlikely to face again.
Supply chain shortages cannot be ignored today, and may only get worse if the COVID-19 global crisis continues. The thoughts above are likely to lead to productive ways forward that create, rather that destroy, value for all concerned.