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COVID-19: Suspension costs – taking the pragmatic approach

By Finn Collins

COVID-19: Suspension costs – taking the pragmatic approach

1 April 2020

The first question on claiming suspension costs at the moment is to ask whether it is right - when everyone is suffering - to ‘throw in the kitchen sink’ in claiming delay costs when work starts again. This will no doubt be the subject of moral debate in discussions about the costs of delays between contractors and principal’s representatives.

The current crisis is shining another spotlight on the fragility of many firms in the sector. But we didn’t need it to. A spotlight was already on large firms due to the collapse of Mainzeal followed some years later by other well-known names. Fletchers’, a darling of the industry for many years, proved in recent years that no construction firm walks on water, and it failed in a time of a construction boom. To tar all construction firms with the same brush of mismanagement endured by these firms would, of course, be a nonsense, but the adversarial nature of contracting does not help firms in a time of crisis.  In a blog from Dave Rogers from Building.co.uk [“The dilemma of keeping building sites open shines spotlight on industry’s real problems” Dave Rogers, 26 March 2020, Building.co.uk ] he noted:

There has been much talk, in particular the last few years, about the industry becoming less adversarial but so much of that seems to have just been fine words. T’was ever thus.

With contractors running on tight margins and wearing the costs of materials and labour it is likely to be too much of a burden for some. I have had many phone calls from contractors expressing frustration and disappointment from having their payment claims, which were issued before the lockdown, significantly undervalued and then a refusal or guarded response to a claim for any delay costs arising from the suspension.

For the moment, a contractor has limited leverage in response – threatening suspension of work at the moment in the unlikely event that was contractually possible - would obviously be a wasted effort. But it may be a case of watch this space in terms of cost increases and other delay costs following resumption of on-site activity. That’s why a ‘do unto others as you would have them do unto you’ approach at the moment is likely the best approach.

As an aside, many contractors and those in their supply chain will now be also be asking whether the cost of preventive measures will be worse than the virus. Lord Sumption, recently retired from the UK Supreme Court, has now come out swinging against what he describes as a collective public hysteria that has caused governments to take extreme measures:

Hysteria is infectious. We are working ourselves up into a lather in which we exaggerate the threat and stop asking ourselves whether the cure may be worse than the disease. [Comments made to BBC Radio 4:The World at One]

Whether he’s right or wrong - which we will only know with hindsight - let’s not make this lockdown any more painful than it needs to be. This is the time for collaboration, not defensive measures that will only serve to heighten the feeling of cash flow panic in the industry. Stalling and defensive measure by those who hold the purse strings is also counter-intuitive because it inevitably forces contractors to adopt a more claims focused approach. Consider the plight of the contractor:

  • they are unlikely to receive any further substantial payments until they re-establish on site and then commit over one more month of materials and labour, with all the cost absorbing that goes with that and then have to wait for the payment cycle on that work to be worked through before they get paid.
  • they run a business that is low margin but high cashflow, with little assets of balance strength, due to not only sensible advice from their advisors but through many contractors having experienced repeated large scale litigation over defects.

Russell Lund of construction company Lund South, in an outspoken article in the latest National Business Review on the difficulties faced by many larger contractors - primarily due to the low margins/high costs faced by most contractors – noted: “Adding another layer of stress to the situation, as a result of the judgment against the Mainzeal directors, directors are acutely aware of their personal liability should they allow their company to trade while insolvent, and if the company is insolvent they have no option but to call in the receivers.”

On the flipside there are also a number of people in charge of the purse strings who have been doing the right thing and the kind thing. A quantity surveyor who frequently acts for banks, who shall remain unnamed, recently had this to say:

Essentially, right now, certifying cost to complete is near impossible. Thankfully, the banks are sympathetic and understanding, and payments are made, no one points fingers, insurers aren’t notified and the show goes on. People get paid.

I love the Kiwi attitude. For heaven’s sake, if we can get behind a multi-million dollar boat race, buy red socks and generally give it our all – surely we can get through this?

I anticipate that the vast majority of contractors will not be throwing in the kitchen sink on delay costs and letting the contract become a battleground. They know that principals will be hurting too. Pragmatism needs to win the day because it is very likely that none of the current contracts adequately deal with all the financial implications of the current lockdown.

My suggestion is don’t for the moment ask your lawyer to write letters on his or her letterhead unless that is really necessary.  Keep the lines of communication open. By all means usefully engage your lawyer to get advice and help draft an email or letter, but keep it on your letterhead and show a willingness to engage.

If you need advice on this, on any other matter affecting your construction business during the current lockdown period, please contact Finn Collins, P: 04 916 6428, E: finn.collins@gibsonsheat.com