Select Page

By Andrew Illingworth, Senior Director, Contract Solutions | April 2, 2020

Our clients are understandably concerned about how to safely navigate active construction projects through the coronavirus crisis. We’ve been listening to your worries and needs, and our professionals have prepared a series of questions that developers should be asking themselves. What are your key risks? What are the potential impacts? How can you mitigate these?

Protecting the interests of owners and developers

Practical advice to navigate your active construction projects through uncertainty

Part A:  How the coronavirus crisis could impact your project – Protecting your interests

Posted:  March 25, 2020

Blank

 

 

Current site status

  • Are sites currently shut down or restricted? Are you already seeing impacts?
  • Reduction in labour attending site or working off site?
  • Delays or failure to meet the delivery of key materials to the site?
  • Inability to obtain third-party services such as utilities or building inspectors to advance the project in line with original expectations?
  • Underlying health, safety or welfare issues impacting your project, such as an inability to maintain physical separation requirements?

Potential change to status

  • Will the site need to be shut down more permanently?
  • When might that be? What would this look like? Will this incur additional costs, including demobilization of key trades and equipment?

Looking beyond the crisis

  • When the situation eases, what will remobilization look like?
  • Will there be a period of reduced productivity that impacts your project further?

How could the current crisis impact your construction project?

The first step in navigating a crisis requires gaining a clearer understanding of current and potential impacts to your project. Consider the following questions to help you determine the most appropriate strategies to address these impacts.

 

Current site status

  • Are sites currently shut down or restricted? Are you already seeing impacts?
  • Reduction in labour attending site or working off site?
  • Delays or failure to meet the delivery of key materials to the site?
  • Inability to obtain third-party services such as utilities or building inspectors to advance the project in line with original expectations?
  • Underlying health, safety or welfare issues impacting your project, such as an inability to maintain physical separation requirements?

Potential change to status

  • Will the site need to be shut down more permanently?
  • When might that be? What would this look like? Will this incur additional costs, including demobilization of key trades and equipment?

Looking beyond the crisis

  • When the situation eases, what will remobilization look like?
  • Will there be a period of reduced productivity that impacts your project further?

Who will be impacted?

Along with gaining a clearer understanding of current and potential impacts to construction projects under development, it’s essential to identify all the key stakeholders involved and potential effects on them. Use the following as a guide to develop your own stakeholder list and impact assessment.

 

  • Buyers / end users: what might be the impact – is there a risk of default due to the economic challenges? What information do you need to share with them? How will you communicate with them?
  • Lenders, investors, equity partners and financial stakeholders: what is the impact on project economics, lender and developer agreements and cash flow requirements?
  • Sureties: do they require status updates on delays and costs?
  • Construction managers, contractors and subtrades:
    • What is your current contractual position, your obligations and entitlements?
    • What notifications do you need to give or receive and what is the timing and nature of these?
    • What follow-up documentation / substantiation will be required to satisfy your contractual obligations and entitlements?

What approach should you take to protect your commercial interests?

There is no doubt the Coronavirus pandemic will have a significant impact on the performance of construction projects. There are a couple of options to protect your commercial interests and ensure you are only liable for the legitimate costs.

Take a passive approach

  • Wait for impacts to be crystallized or claimed

Take an active approach

  • Identify potential risks and impacts.
  • Gather and consolidate the necessary information, including records that could be required to defend unsubstantiated costs and to gain clarity on the timing and costs likely to be incurred.
  • Evaluate your options and make informed decisions.
  • Be nimble; continue adjusting your approach as the situations shifts.
  • Explore new structures for acquisition and business relationships, including strategic alliances.
  • Consider federal and provincial government incentives.

At this stage, we believe taking a strategic approach is vital to enable greater control over outcomes.

Part B:  Potential impacts on various project stakeholders

Posted March 27, 2020

The previous section – How the Coronavirus could impact your project – highlighted the importance of identifying the key stakeholders in your construction projects. In this section, we provide more insight to the considerations required for the various project stakeholders.

Blank

 

  • The delivery of your project is likely to be delayed, but by how long?
  • What notifications and information must you provide to end users and statutory bodies such as Tarion?
  • What is the impact on the key dates and deliverables of your project?
  • If there are government restrictions to construction work, when these are lifted can you quickly develop accurate schedule projections for the construction of the balance of the work?

Developing an accurate, feasible construction schedule is essential for managing risks and expectations – especially in the current climate. Your refreshed construction schedule will allow you to manage and model cash flow and acquire valuable insights into how changing dynamics will vary your project economics.

If you require support in evaluating effects on schedules and costs-to-complete, Altus Group would be happy to help.

Owners and end users

For owners and end users, gaining clarity on your project schedule and economics is critical.

  • The delivery of your project is likely to be delayed, but by how long?
  • What notifications and information must you provide to end users and statutory bodies such as Tarion?
  • What is the impact on the key dates and deliverables of your project?
  • If there are government restrictions to construction work, when these are lifted can you quickly develop accurate schedule projections for the construction of the balance of the work?

Developing an accurate, feasible construction schedule is essential for managing risks and expectations – especially in the current climate. Your refreshed construction schedule will allow you to manage and model cash flow and acquire valuable insights into how changing dynamics will vary your project economics.

Lenders, equity partners and financial stakeholders

Most financing agreements include obligations with which borrowers must comply.

You need to consider whether any of these obligations are triggered by the impact of the COVID-19 outbreak on your project. At the same time, lenders have the right to request information and you must respond to such requests in a timely manner.

You are likely to see project economics decline during this period of pandemic disruption, including:

  • Pressure on cash flow requirements, such as increased loans, lines of credit or swing facilities
  • Greater probability of defaults and closing risks, such as residential and commercial leases
  • Delayed or deferred loan paydowns and reduced security.

Be aware of any required notifications to financial stakeholders under information covenants in finance documents. In some cases, a loan monitoring report from a qualified project monitor may be helpful to clarify a project’s cost-to-complete, and potential risks and pitfalls.

Sureties and insurers

In a disruptive or distressed financial environment, insurers and surety companies tend to reduce their appetite for risk.

There is likely to be a change in the risk profile of some construction projects and bonding capabilities on others. Since this could lead to higher insurance costs or claims against bonds, it is important to be vigilant regarding schedules for bonded projects.

In addition, the Surety Association of Canada is recommending digital bonds to minimize delays as a result of the COVID-19 crisis. Be sure your company can adapt your processes to email digital bonds in place of paper bonds. The Association also suggests that as the global crisis stabilizes, requests for tender and proposal documentation should allow digital bond submissions.

Construction managers, contractors and subcontractors

In light of evolving conditions, review contracts for your entitlement, duties, risks and remedies related to construction managers, contractors and sub-contractors.

Consider the following questions as you examine these documents:

  • Are there any issues with interpretation of key clauses – for example, what constitutes force majeure events?
  • Have you reached thresholds that activate these? For example, is there a shutdown in effect or are we experiencing a slowdown in output as a result of government restrictions?
  • What events are likely to affect production on your site at this time:
    • A stop-work order?
    • Availability of labour and union-mandated restrictions in working practices, such as worker separation requirements?
    • Inability to procure, fabricate or deliver key materials to the site?
    • Delays in approvals and provisions by third parties, such as municipal or utility inspections and approvals?
    • Health, safety and welfare considerations, such as an outbreak linked to the site?
  • What notifications are required under the terms of your contract? Have these been received in in a timely manner?
  • Related to contractual notifications:
    • What substantiating documents do you need and when?
    • What constitutes satisfactory supporting documentation to any claim for losses as a result of delays caused by the current situation?
    • As the basis for establishing a claim, what records need to be retained, provided to you or verified?

You can mitigate significant risks with a thorough understanding of the obligations and entitlements of your contract(s) and develop a corresponding action plan with clear priorities and deliverables.

Please do not hesitate to contact your Altus Group advisor if you require assistance interpreting your contract obligations or expediting the above.

Part C:  Contractual obligations – risks and mitigation strategies

Posted March 31, 2020

Carefully reviewing construction contracts should be one of your first steps to fully understand the impact of the COVID-19 pandemic on your project. This includes understanding your rights, entitlements and obligations for proposed or pending contracts as well as existing contracts.

What does your contract say?

While most construction contracts are based on standard forms, every contract represents a unique agreement between the parties. A thorough review of the entire contract should be conducted, focusing on the following information in relation to COVID-19:

  • What do the contract clauses and/or supplementary conditions specify?
  • Are there any relevant specification sections in your contract documents that dictate the nature and timing of deliverables in the event of notification of delays?
  • Are there “force majeure” or “any cause” clauses related to events beyond the control of the parties? COVID-19 restrictions might be addressed under these provisions.
  • Are there applicable exception or exclusion provisions?
What are your entitlements and obligations?

Now that you have a clear picture of the requirements of your contracts and their supplementary conditions, it’s time to look at your projects under the lens of COVID-19 impacts on construction progress. What are:

Your obligations:

  • Are you or your consultants obligated to provide contractors with any notice, guidance or opinion on issues as they arise?
  • Have you considered giving notices to contractors under your rights to suspend or terminate work? Have you assessed what the implications of this may be?

Your entitlements:

  • Has the construction manager or contractor provided you with timely notice under the terms of the contract? If so, does the notice sufficiently describe the actual cause and effect, or is it simply a broad notice due to the current crisis?
  • Have you received, or are you receiving, substantiating records in a timely manner? Are they accurate? How are you validating them? These records may prove to be critical for future claim defense.

Understanding and mapping your obligations and entitlements helps you devise an appropriate strategic approach based on the specifics of your contract – ultimately reducing project risks and costs.

How can you address the potential risks?

In light of the global disruption caused by the coronavirus pandemic, effective risk management is essential for construction projects. The ability of owners and developers to continue building and to complete projects on time and on budget are increasingly at risk.

The attention of owners and developers is being diverted to addressing the daily challenges caused by the COVID-19 disruption. At the same time, it is important to maintain separation between ordinary construction issues and those caused by COVID-19 to effectively resolve future claims.

Inadequate schedule delay analysis, for example, is a key contributing factor to disputes, resulting in failure to resolve claims in a timely manner. To avoid this potential issue, identify the specific risks associated with the COVID-19 crisis and establish separate expectations and deliverables related to this event.

A forensic schedule analysis helps you isolate when each delay occurred, its effect on the schedule, and apportion to each party. This will prevent entanglement with any other previous and concurrent construction issues for which the required remedy may not be the same.

What mitigation strategies can you employ?

While there is great uncertainty as to the possible impacts of the ever-changing measures governments and businesses are using to address the COVID-19 pandemic, you can take some simple but vital steps to protect your interests. These are:

  • Know your short-term liquidity.
  • Stress test your business plans and project pro formas under multiple scenarios.
  • Frequently monitor key variables relative to the unfolding reality.
  • Source capital/liquidity options internally and externally.
  • Consider portfolio resets.
  • Gain a clear understanding of the progress and financial position of your project prior to this event.
  • Develop a proactive risk management strategy based on your current contracts and relationships.
  • Establish an action plan with clear timelines and deliverables for all parties involved.
  • Gather and organize documentation for key metrics such as labour on site, equipment and deliveries. These will be important components of the contemporaneous records required for a robust analysis of the impact and costs of events related to COVID-19.

These steps are considered best practice in the normal circumstances – today they are indispensable.

Part D:   Minimize claim risks: contracts, delays, disruption and costs

Posted April 2, 2020

What are the key provisions in your contract related to potential claims?

In the construction industry, delay and disruption claims can be some of the most difficult disputes to settle. The confusion around the impact of COVID-19 on projects will only exacerbate this situation.

Maximize your ability to save substantial time and money by undertaking steps now to avoid or mitigate claims. Take the time to understand the key contract provisions as they relate to the current COVID-19 environment.

  • Entitlements of all parties.
  • Notice provisions required (the timing and nature of each).
  • Your obligations with respect to delay notification follow up, such as supporting documentation.
  • The consultants’ obligations related to providing opinions and award of time and costs.
  • Termination clauses, how they might be enacted and the related risks.
  • What costs are payable?
  • The dispute resolution options provided (for example, negotiation, mediation, arbitration and/or litigation) and any opportunities available to resolve efficiently and quickly.

Based on your understanding of these provisions, consider what actions you should take.

  • Has the contractor provided timely, correct notification?
  • Have you gathered sufficient, clear information to substantiate any alleged impact as a result of the alleged event(s)?
  • Are claims backed by quantitative analysis and verified records to establish the facts?

Equipped with a thorough understanding of your contract, answers to these questions and the appropriate records, you can make a fair and reasonable assessment of your liability to the contractor.

How can you prepare for possible delay claims?
In the midst of the COVID-19 pandemic, establishing and proving a delay claim could rapidly become complicated. Mitigate potential disputes now by establishing the necessary elements to justify a delay claim. Here are starting points to consider.

  • Prepare a detailed construction schedule (an agreed baseline schedule) for your project.
  • Immediately launch a review to establish the position of your project before to the alleged event occurred. Remember: this is not binary. The situation evolved with a reduction in production prior to a likely shutdown.
  • Clearly catalogue the event(s) that have taken place and their timing.
  • Establish the critical impact to the project by determining –  in an agreed and industry recognized manner – the impact of these events on the construction schedule.

Completing these steps will help to establish liability and potential costs attributable to the parties to the contract.

How can you prepare for possible claims related to disruption?

Disruption claims will be pursued by contractors to recover damages for loss of productivity when labour and equipment costs exceed what was planned. Disruption claims, however, are challenging to prove – even more so given the uncertainty of the current environment. Workers may find it difficult or impossible to show up to work or may work more slowly due to worry and stress.

Preparing to defend or validate damages claims now will prove to be a valuable advantage later, but where do you start? You can begin by asking yourself these questions:

  • Are you maintaining detailed and verifiable records?
  • Can these documents be provided immediately upon request?
  • What analysis is required to accurately capture the impact of the disruption?

There are several recognized methods of analyzing and quantifying the total cost of a disruption, depending upon the circumstances and factors involved.

How can you verify costs related to claims?

All parties involved in a construction contract are obliged to mitigate costs through the entire progression of the contract. The disruption arising from the COVID-19 pandemic makes this particularly challenging.

Managing entitlements effectively can help you minimize settlement costs. If contractors, for example, have demonstrated entitlement to additional costs, you need to verify that the parties are being compensated adequately and reasonably.

Start by assessing the complete range of costs involved with your specific project – these can vary widely from one project to another so it’s important to consider the following:

  • Direct costs – related to the impact of a change in scope.
  • Indirect costs – related to events such as project delay or disruption and any additional general condition costs.
  • Overhead and profit – establishing an equitable solution for loss of overhead.
  • Escalation and financing costs – when delays are significant.

While the burden of proof lies with the claiming party, complete records are always required to effectively defend or verify costs.

Questions for our experts?

We are here to provide practical advice to our partners by answering frequently asked questions.  We will continue to update this page as the situation evolves.  Send us your questions.

close
close
forumContact us
close
close

Thank you for contacting us. we will get back to you shortly!

This site uses cookies to improve your user experience. By using our website, you are agreeing to our use of cookies.
Click here for more information.