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As Singapore exits the circuit breaker safely from 2 June 2020 and opens up the economy in three phases, construction companies continue to face specific challenges. Many projects that have halted temporarily and may have now obtained approval of the government to restart activities can expect to be delayed by supply shortages and other issues. In this bulletin, we offer clients some perspectives on how to meet these challenges, starting with ensuring the health and safety of employees.

Health and safety risk

The risk of exposure to COVID-19 is no different for employees of construction owners, contractors and suppliers than for the general population. Owners, therefore, must consider the physical well-being and safety of all project team members, stakeholders, and participants on construction projects and follow reasonable guidelines and recommendations of government authorities and healthcare professionals. As experience has shown in other countries, confirmed cases of COVID-19 expand exponentially if health and safety controls are left unheeded.

Construction owners should enforce all health and safety procedures on their construction sites including, but not limited to, sanitary protocols, proper hygiene, social distancing, use of personal protective equipment (PPE), toolbox talks on special COVID-19 requirements, system (e.g. contract-tracing TraceTogetherapp) to track health status of workers, regular COVID-19 testing, housing workers on the same worksite, and prompt reporting of health issues related to COVID-19 by construction workers.

Contractors and subcontractors must put safeguards in place to keep workers exposed to COVID-19 away from construction sites for at least 14 days after the last potential exposure.Some emerging better practices on construction sites include actively encouraging sick workers to stay in their place of accommodation, measuring workers’ temperatures and assessing workers symptoms regularly, curtailing large meetings, staggering shifts and meals times, regular cleaning of common and worksite offices and meals areas, and –for large projects –expanding the capacity of on-site medical facilities.

MOM also requires employers to establish a system to implement Safe Management Measures to provide a safe working environment and minimize risks of further outbreaks. These measures include implementing a detailed monitoring plan to ensure compliance with Safe Management Measures, appointing Safe Management Officer(s) to assist in the implementation, coordination and monitoring of the system of Safe Management Measures at the workplace, reducing physical interaction and ensure safe distancing at workplaces, supporting contract tracing requirements, requiring PPE and observing good personal hygiene, ensuring cleanliness of workplace premises, and implementing health checks and protocols to manage potential cases.

For more information on current MOM guidance, you may access the link below.1

Completion Risk

Due to the potential of widespread impact of the COVID-19 pandemic, many construction projects and programs will experience delays and disruption. On 3 April 2020, Prime Minister Lee Hsien Loong announced a circuit breaker to run from 7 April 2020 to 4 May 2020. New clusters in several dormitories, including S11@Punggol, Westlite Toh Guan, and Toh Guan Dormitory were identified. The next day, additional measures were announced to contain clusters in dormitories. On 15 April 2020, Singapore reported 447 new cases, with 407 linked to foreign worker dormitories.2 The circuit breaker was later extended to 1 June 2020. The number of COVID-19 cases diagnosed in foreign workers continued at three digits daily as the government ramped up the testing of the workers. Workers have also been re-housed and employers will have to adjust to their workers being in different locations with new arrangements. In a tight labor market, construction firms were already struggling to find workers to complete projects on time when phase 1 of the opening commenced on 2 June 2020.

COVID-19 is also causing supply chain disruption, cash flow concerns, and funding / financing restrictions. As a result, critical work activities may need to be extended or rescheduled, and contractors may need to adjust their means and methods for performing work to comply with governmental instructions and mandates.

Construction owners must act quickly to identify, assess and mitigate completion risks on their large capital construction projects and programs. This may require owners to conduct detailed schedule reviews for ongoing projects, especially those in early to middle stages of completion. Instead of adjusting determinative schedules, owners may decide to perform quantitative risk assessments, or QRAs, on their schedules to understand the range of uncertainty regarding likely completion dates. Developing procedures for and executing QRAs on large construction projects is a project-control leading practice for both owners and contractors.

Commercial risk

COVID-19 impacts also include commercial risks, such as commodity price swings, labor costs escalation, extended performance costs, and higher interest payments. If contractors must source concrete, steel, lumber, and drywall from suppliers charging higher costs due to COVID-19 interruptions, owners may be asked to foot the bill. Labor costs may also be higher if contractors are forced to choose from a limited pool due to travel restrictions. If project completion dates are extended, owners are also exposed to higher costs for internal project management staff, third party construction managers, and consultants. Such delays are also likely to result in increased financing costs, management fees, and developer costs.

Owners can prepare for commercial risk on construction projects by engaging with contractors and stakeholders in early discussions on the potential impact of COVID-19 containment measures.

Owners are encouraged to assign personnel and develop processes to document all commercial impacts for which contractors and stakeholders may potentially later seek economic recovery. Most importantly, owners should advise contractors, suppliers, consultants, and others that notice provisions in contracts will be strictly enforced or come to an amicable agreement to revise the terms and that COVID-19 impact costs will not be considered or minimized unless owners are kept informed as per contract requirements. Owners should also be vigilant about reviewing daily, weekly, and monthly progress reports; analyse changes in the contractor’s labor force; and query contractors about all cost and schedule impacts reportedly related to COVID-19 issues.

Contractual risk

The responsibility for delays, disruption, and commercial risks are typically spelled out in construction contracts and appropriately allocated to the party in the best position to mitigate such risks. Delays caused by COVID-19 impacts may be covered under a force majeure or similar clause of the contract. Contractors will argue that COVID-19 related delays were wholly unforeseeable and outside of the contractor’s control, and therefore the contractor should not be held responsible. Under these circumstances, parties should be aware of the consequences of invoking force majeure clause that will, for example, cease their obligation to perform under the contract, right to extension of time, a temporary suspension of work, loss and expense or entitlement to termination.

Price escalation provisions in contracts permit contractors to negotiate labor and material price increases if they exceed pre-defined thresholds or percentages of the baseline cost estimate. Should COVID-19 related impacts increase the contractor’s labor and material prices beyond these thresholds, the contractor may be entitled to an equitable adjustment of the overall contract price.

Contractors will need to supply the owner with objective evidence of price increases and show that such increases exceeded contractual limits.

Owners are encouraged to review their construction contracts and determine if there are force majeure, suspension of work, or stop work order clauses that would provide relief to contractors seeking time extensions.

Project directors should pay particular attention to contract provisions that allow the contractor to request compensation for: acts of God, governmental action, pandemics, or owner-directed suspensions and work stoppages.

As noted, owners should encourage early discussions between project teams and contractors to determine if COVID-19 related impacts are likely to affect their projects. Owners should state, orally and in writing, that contractors and major suppliers must provide notice of delays and cost impacts under proper contract clauses and that detailed record keeping will be required to substantiate claims.

risk for construction owners infographic

Conclusion

Owners are encouraged to review COVID-19 related risks on capital construction projects, programs and portfolios sooner than later. While COVID-19 construction risks may vary by project type, size, and location, one thing is for certain – owners will need to implement strong controls to support stakeholders and protect contractual rights. If support is needed, KPMG in Singapore’s professionals are here to help you.