This is a theoretical story about a contractor dealing with the impacts on cost and time as a result of COVID-19 under a JCT Design and Build Contract. By Andy Dunbar
The contractor has been engaged in a design and build project to refurbish a mid-19 century dwelling to a country club and wedding venue. Both parties signed the contract early February 2020 and works commenced with demolition on site March 2020. The duration for the build is two years, with completion due in March 2022.
COVID-19 arrived in the UK in early 2020 and the impact continues to be felt into 2021. This article takes a look at some of the theoretical impacts and contractual implications of the pandemic.
JCT Design & Build 2016 (standard form no amendments)
The JCT D&B contract form is designed for the contractor to both design and construct the works. The employer (client) provides all documents that outline what the building requirements are. The price is based on a lump sum with interim stage/periodic payments. The provisions of the contract include for handling of issues such as collaborative working, sustainability, payment, bonds and third-party rights / collateral warranties.
As stated above the price is based on a lump sum with interim stage/periodic payments. The client has no additional cost to pay unless the contractor notifies him of a Relevant Event/Relevant Matter (as defined in the contract). In which case, the client would require further particulars to justify impacts on costs. A detailed examination of variations and their treatment under JCT can be found in this Decipher podcast.
Perhaps significantly on this project, the client has furloughed some of the project’s management team. This has not affected costs too much as the governments furlough scheme pays for furloughed staff.
Nevertheless, the government scheme only paid 80% of staff wages up to a max of £2,500 per month.
So: what costs have to be covered by the client in such a scenario?
Cost implications and preparations for claims
The contractor has been hit with several impacts resulting from COVID-19. Due to the requirement to self-isolate, several staff have gone into isolation, for which the contractor paid sick pay. The contractor has also been faced with several workers refusing to go to site due to the site not being safe enough. These staff members referred to the following clause in legislation:
“It shall be the duty of every employer to ensure, so far as reasonably practicable, the health, safety and welfare at work for his employees”
As a result, the contractor has had to shut the site down to make it safe. This lead to further costs. For example, upgrading changing, cleaning facilities & upgraded welfare facilities.
It is anticipated that procurement costs will change. For example, if fewer drivers are available, the contractor may have to pay a premium for on-time deliveries. Critically, if they were to do this and try to make a claim the contractor would need to prove what they paid before COVID and what they paid after.
Assuming the risk lies with the employer in the contract, detailed records would need to be kept and demonstration of the effect upon costs would be needed.
Manufacturers also closed their facilities and furloughed their staff. Therefore, payments scheduled to be sent to these manufacturers have been put on hold until return to work. There is the potential that some of these companies would go into liquidation. In these cases, the country club might lose at least some of what they have already paid.
Delay and time implications
The duration of the programme has undoubtedly increased. Due to the restrictions on working and self-isolation and the government lockdown, supply chain companies ceased working. Additionally, procurement came to a virtual standstill. The steel for the reinforcement was on an 8–12 week lead period. So once the demolition is complete, the reinforcement (which was on the project’s critical path) is delayed, further extending the completion date.
Additionally, the project is operating at a reduced rate of working. Where there were four demolition staff working in one room, the 2-metre rule relating to confined spaces means we now have 2 staff in that same room. There is the potential for the work to consequently take twice the duration. Though this would need measuring and evidencing in order to prove entitlement.
Upon opening sites after lockdown, the overall working output was 20% lower than pre-COVID-19. This impact this lasted for several months, resulting in further delays and extended programme completion dates.
Options available to both client and contractor
The real issues to address are threefold:
- Is the contractor entitlement to time and/or money?
- What are the client’s obligations?
- What are the contractor’s obligations?
The client’s options include:
- Administer the contract strictly. Cl 2.26.4 suggests that COVID-19 is force majeure and therefore a Relevant Event. If demonstrable, then an Extension of Time (EOT) should be granted to provide relief from damages.
- Take a collaborative approach and mutually agree to suspend the works for the COVID period with no cost penalties. The Construction Leadership Council COVID-19 Contractual Best Practice Guidance Note encourages this approach.
- Take a benevolent stance and allow the contractor time and pay his costs.
The Client may need to consider furloughing its own staff serves as an act of prevention. For example, where designs are not signed off/approved timeously. Such an outcome may provide the contractor with entitlement to claim Loss and Expense (costs) under Cl. 2.26.6 [impediment or prevention], both a Relevant Event and a Relevant Matter.
In April 2020 the government released a document, “Coronavirus (Covid-19) and JCT Contracts“. This gave guidance on how clients and contractors should work through COVID-19. The document stated that the JCT contract is a collaborative contract and to keep the cashflow going the client has an obligation to pay the contractor staged payments. Both parties need to communicate with each other on how to deal with cost issues and agree a way forward to complete the scope of works.
It is likely that the client will seek to recover at least some costs as a result of the liquidated damages (LD) clause in the contract. These define pre-determined dates set in the contract which are tied to a sum of money. If the contractor fails to meet these dates then the contractor is liable to pay this cost.
The contractor, however, needs to follow the contract and guidance in order to retrieve or avoid liability for costs. The delay issues of COVID are either the virus issue (where a member of staff has contracted the virus) or a government issue (where the government has closed ports or airports and shut sites down).
Contractor options are:
- Claim for time under the contract as stated above.
- Find a route to identify where the client has liability, and try to claim for money.
- Issue notices and update them, as under JCT a timely notice for L&E is a condition precedent to payment.
- Close the site entirely.
The latter option is risky as technically this is may be viewed as a repudiatory breach of contract. In such circumstances the client may determine the contract. I.E. terminate the employment of the contractor and employ others at the contractor’s expense to complete the works. It is worth noting that the contractor is under an obligation to constantly use his best endeavours to prevent delay to the completion date.
In any case, the contractor should seek to minimise cost and time impacts. It may do so by working closely with its supply chain and its client. It may be that to reach agreement on the best outcome for all means less than strict adherence to the contract. For example, it might be in the client’s interest to secure the completed building earlier than the contractor is entitled to claim an EOT. Therefore, the client may wish to pay a little extra even if not contractually obliged to do so.
Delay and Time
In terms of time, to claim an EOT the contractor must try to mitigate delay and continue to work if safe to do so.
The contractor must give notice to the client as soon as it becomes apparent that there is a delay to the project duration. This will come in the form of a notice which details the cause of delay and identifies a Relevant Event under the provisions of extension of time.
“The contractor cannot recover loss and expense either in respect of an extension of time for the Relevant Events” but can recover costs on a Relevant Matter.
Relevant Events are either caused by the client or are a neutral event which are set out in the contract. Below is an extract of what Relevant Events comprise:
Relevant Events cause delay to the completion date by a neutral event (not client or contractor related) or by the client itself.
So, what is force majeure?
Force majeure is a French phrase and does not have a strict definition under English law. This opens the debate as to whether COVID-19 is/was a force majeure event.
Generally, the perceived wisdom is that COVID has become recognised as a Force Majeure event. Reference should be made to the case of Lebaupin v Crispin  in which an epidemic was determined to be a Force Majeure event.
The world health organisation classed the COVID 19 a pandemic on the 11 March 2020. This would be the point at which the contractor should have issued notices. The contractor would then need to keep putting in notices for every eventuality i.e. Unproductive working.
It is also worth considering whether subsequent shutdowns would be considered force majeure, as they may have been foreseeable. In the event a project started after the initial period of the virus, such claims would likely be more difficult to substantiate, and may even be barred in contract.
A Relevant Matter is a client responsibility that affects the progress of the works. This enables the contractor to claim under loss and expense.
Relevant Matters include the following:
Consider if the client had closed the site due to COVID or did not provide suitable access for the contractor to work. In such cases, the contractor could claim for the cost used on site i.e. preliminary / overhead costs for staff etc. Decipher have produced a separate article on this.
COVID 19 presents an uncertainty over whether contractors can gain time or money. Under JCT, force majeure links only to time. Therefore, if the contractor gets an Extension of Time (EOT) then they are not able to claim for costs. Records are the best tool for claiming an EOT. Contractors should provide good, accurate records of their best endeavours, delays in the programme and costs separately identified.
Figures show that in in March 2020 construction output figure dropped by 5.9%. However, this was not felt across the whole construction sector. It was mainly in urban areas in the city where volumes of people need to distance themselves. So, in this case as the country club is in a less populated area, we would not expect much of a decrease compared to the city. This could have an impact on the contractor’s ability to claim.
The contractor sits somewhere between a rock and a hard place. Does this suggest the JCT is not as collaborative as its authors might perhaps hope? The contractor can only terminate its employment under the contract in the event of an act of prevention leading to frustration. The legal definition of frustration is something that is ‘impossible to deliver’. Therefore, the fact that COVID made things more difficult and/or more expensive does not necessarily lead to frustration.
If all these approaches fail and a formal dispute arises, there is always the approach of going through the courts or turning to Adjudication, or Arbitration, or some other form of dispute resolution.
References & Further Reading
- https://www.jctltd.co.uk/product/design-and-build-contract [Accessed 16/11/20]
- https://www.designingbuildings.co.uk/wiki/Relevant_events_v_relevant_matters [Accessed 16/11/20]
- https://en.wikipedia.org/wiki/Timeline_of_the_COVID-19_pandemic_in_the_United_Kingdom_(January%E2%80%93June_2020) [Accessed 16/11/20]
- https://www.ciobacademy.org/moodle/mod/lesson/view.php?id=4281 [Accessed 16/11/20]
- https://construo.io/c/guides/32/covid-19-insight-navigating-a-new-world-a-paper-by-mace-may-2020 [Accessed 17/11/20]
- https://www.macegroup.com/perspectives/200513-how-will-covid-19-impact-construction-finances [Accessed 18/11/20]