Do I need to amend my construction and engineering contracts to deal with Covid-19?

28th August 2020

In short, the answer is almost certainly “yes”. We have dealt with dozens of enquiries over the last few months with regard to existing contracts, such as JCT and NEC contracts, and how they should be interpreted in light of Covid-19. As the interpretation is often unclear, we have more often than not, been involved in subsequent negotiations and redrafting contracts.

What are the key issues?

The key issues generally centre around whether a contractor is entitled to an extension of time (and relief from liquidated damages) and whether it is entitled to additional costs incurred (e.g. prolongation costs from being on site longer, and additional costs from less efficient working methods due to restrictions on working conditions).

Another key issue is whether the termination provisions in the contract need to be amended to allow one or both parties to get out of the contract if it is delayed or has become uneconomic.

Generally, most parties have agreed that an extension of time (and therefore relief from liquidated damages for delay) may be granted, but there has been a less consistent approach regarding additional money. In some instances, funders and developers have agreed some additional payment should be made (e.g. additional “prelims” i.e. on site costs) or some addition to the contract price. The difficulty with an addition to the contract price is that it’s quite difficult to build in a price for the consequences of Covid-19 – although some developers and funders prefer this so at least there is some greater costs certainty.

Are there any standard amendments to deal with Covid-19?

The Construction Leadership Council (“CLC”) has recently published some proposed standard amendments to the JCT D&B 2016 and NEC3 and NEC4 contracts. Helpfully, the CLC has set out three drafting options allowing for: time but no money; or time and full recovery of additional costs; or time and recovery of a pre-determined percentage of the cost. The idea is that you agree the principle and then “plug in” the required amendments.

However, as the CLC point out, these need careful consideration and we would advise against incorporating the amendments without taking some advice. In particular, these forms of contracts are frequently amended anyway, whereas the CLC draft clauses are for unamended contracts and therefore if you are not careful, costly errors can arise.

Are there any pitfalls?

There are a number of points to consider including the following:

The CLC definition of “pandemic event” goes beyond just Covid-19 and any mutations of the coronavirus. Whilst this is not objectionable, bear in mind that as it covers other pandemics and infectious diseases it goes wider than some people may anticipate.

On the other hand, even if you do agree one of the options which entitles recovery of additional money, it will not cover increases in material or labour costs, although it will cover delays caused by delay or non-delivery of any materials. A number of our clients have complained that they are having difficulty in obtaining materials even now e.g. plaster and plasterboards.

Whilst the definition of pandemic event includes any consequences which are outside the reasonable control of the contractor including being unable to “adequately resource the works” it is not clear whether this would, for example, include a sub-contractor insolvency. That leads us on to the next point that it is important to consider “flowing down” amendments to the supply chain so that everyone is “back to back”: you do not want a situation where, for example, a main contractor is not entitled to additional money, but its sub-contractor is, and similarly a sub-contractor could be in an awkward position vis à vis a sub-subcontractor or a supplier.

Nevertheless it is good that the CLC has produced these draft templates which are a useful starting point for drafting amendments to the contracts.

For advice on this and other construction industry issues, or for more information, please contact Andrew James on 07711 272782 or at [email protected].