Leadership needs to Extend Beyond Lockdown! Navigating the Soft Re-Opening of Construction in NSW to Ensure a Strong Industry Post COVID 2.0

The recent ‘pause’ on projects in Greater Sydney¹ and the announcement yesterday that construction and infrastructure projects may recommence on 31 July 2021 has caused chaos for the construction industry.

Despite now being entitled to recommence, the stark reality is that for many already distressed projects this will simply not be possible as the bulk of the employees, including consultants and trades, are still in a hard ‘lock down’ for an indefinite period. The intention of this soft re-opening is to be lauded – but how are struggling project participants with no access to relevant personnel going to recommence work and deliver such projects? For some projects remobilising will not be feasible until other restrictions in ‘high risk’ zones are relaxed.

The management of the ‘soft’ remobilisation on site and future re-integration of personnel in lockdown will impact all project participants – from principals, head contractors, subcontractors, suppliers, consultants, financiers and all employees.

The actions such project participants take over the next 2 days will have a significant bearing on the success or failure of current projects. How the recommencement of a project and the remobilisation of work personnel is undertaken will be critical to managing delays, project delivery cash burn and stakeholder expectations.  

In addition to infrastructure, for specific sectors in construction, such as real estate, the prospect of a recission of sale contracts on larger projects due to lapsed sunset dates expiring during the shutdown could result in heavy losses for developers and lead to further distress and enforcement from secured lenders.

Hamilton Locke continue to assist project participants to navigate the myriad of immediate issues in respect of construction projects as a result of the lockdown and ongoing restrictions on movement. This includes urgent assessment and negotiations as to the remobilisation on site, claims for delay and disruption, employment issues as well as project finance and insolvency.

In this article, we outline some of the urgent considerations members of the construction industry need to be aware of, identify key issues we are currently advising on and highlight the need for support across the projects spectrum that will likely need to come from government.

Key takeaways

• From Saturday, July 31, all construction sites and construction work in Greater Sydney outside of the high risk zones will recommence (in some cases with the majority of their labour, consultants and trades restricted from attending as they reside in high risk LGAs).
• The high risk zones are the following local government areas or LGAs- Fairfield, Canterbury-Bankstown, Liverpool, Blacktown, Cumberland, Parramatta, Campbelltown and Georges River. Such LGAs are deemed ‘high risk’ and are subject to stricter lockdown restrictions than other areas of New South Wales.
• These orders mean, amongst other things, that residents of the high risk LGAs cannot travel or work on construction sites until further public health order.
• Clearly, for some projects, where the bulk of their labour force comes from high risk LGAs, it will not be feasible to return to site or recommence works.
• An immediate priority for employers will be how to manage staff both returning to site and, in many instances, those staff who will not be able to work due to being in a ‘high risk LGA. Urgent advice should be sought.   
• Directors who are concerned about the solvency of their business should consider safe harbour now or explore other options available. Directors need to actively monitor their cash flow position, ongoing payment terms for creditors and should undertake a review of their finance arrangements.

Urgent contract issues prior to remobilising on major government projects

These are unprecedented conditions on major infrastructure projects. The state government is delivering a massive pipeline of projects – many of which were late and distressed prior to the first wave of COVID-19. Despite plenty of fanfare as to the use of ‘collaborative’ contract models, far too often, a ‘pass it down’ approach to risk allocation has been adopted and these recent announcements merely exacerbate that risk. In many government projects, the risk of shut down, delay and disruption due to this pandemic falls on the head contractor. Unsurprisingly such risk is often forced down the contractual chain to subcontractors – so it is no surprise that nearly a quarter of formal insolvencies in Australia each year are connected to the construction industry.

In our view, the NSW government should look to urgently provide relief to head contractors from exposure to cost blow outs arising from COVID-19. The NSW government should consider following other jurisdictions, including the UK, that legislated relief from liquidated damages due to COVID-19 delays on the basis this relief would be passed down the contractual chain. This, however, may not be enough depending on how long the restrictions on movement continue. Additional cost, delay and disruption caused by a limited labour force, with COVID-19 safe protocols on site and more site administration and overheads working for an extended program will clearly mean many projects are simply productive than scheduled. Clearly, measures may need to be taken to address such issues that are outside the control of the project participants. Projects are bid for on the narrowest of margins – absent government support, we will have even less competition at the head contractor level. The NSW government should also consider engaging with and putting ‘soft pressure’ on financiers not to levy penalties for a short period on major projects – or to otherwise relieve pressure down the chain. The alternative is an increase in formal insolvency at the head contractor level which has not been seen since the GFC.

Urgent contract issues on all projects

Arrangements should be immediately made to:

• assess the feasibility of returning to site with the labour available under the current restrictions;
• documenting the current state of works and preparing look ahead programs reflecting the impact if the labour restrictions are for a week, a month or longer;
• ensuring distancing and other COVID-19 protocols are communicated to site personnel; and
• negotiating the basis for each project participant to return to site.

A strict approach based on contractual risk allocations will not always be in the best interests of a successful project outcome in this extraordinary period.

During the last COVID-19 period, outside of government projects, we saw numerous project participants adopt pragmatic ‘pain share’ where, for example:

• there was an agreement no LDs would be levied;
• EOTs for this delay were granted (despite the absence of a contractual entitlement); and
• the contractor bore delay costs.

The result when those projects were delivered was that there were no major disputes. Neither party had a particularly successful project – but this was a better outcome than other projects (which are the subject of either ongoing litigation or arbitration).

There is no one size fits all in such negotiations – but the focus needs to be how best to get distressed projects to completion – risk and loss minimisation (there will not be winners).

Resources are stretched. Exploring the engagement of independent quantities surveyors and programmers to assist in a compromise position early is a far preferable dispute minimisation process on many projects in this environment.

Contractual notices and claims

Immediate consideration needs to be given to contractual provisions relating to:

• rights to extensions of time, delay and disruption;
• suspension and demobilization/remobilisation costs;
• loss of productivity and prolongation;
• force majeure and ‘change in law’ provisions (which will depend on the terms of the agreement); and
• developing protocols for communications on how the return to site will be managed.

Understanding your position and strategy to these issues is now critical – including whether to put in place extra-contractual ‘pain share’ type arrangements. Notice and time bars will necessitate the urgent documentation of claims (both upstream and downstream). For this reason, if considering issues such as standing down of employees as detailed below, it will be critical to ensure a skeletal contract administration capability during the shutdown – as claims will continue during this period.

How these issues are managed at a project level is critical – as this needs to be assessed and communicated to project teams as a matter of priority. Many of the same issues will be exacerbated by delays arising from long lead supply items, increased storage costs, freight delays and delays in supply arrangements.

In extreme cases, if not feasible to recommence on site for an extended period, many will attempt to assert frustration arguments. For contracts post-COVID 19’s first wave, this will be a very difficult argument – certainly not one which could be raised this early in the second wave. If force majeure clauses address such risk, then this argument falls away entirely. Getting such calls wrong risks repudiation – but in a desperate market, it has been extraordinary to see how cavalier some contractual parties are and how misunderstood the availability of such remedies are to alleged aggrieved parties.

Employment issues

For many employers, the soft recommencement of construction work will allow employees who are permitted to attend worksites located outside of the restricted LGAs to resume their duties. However, there will no doubt be instances where a large proportion of the workforce is unable to attend a worksite located outside of a restricted LGA. In some circumstances, it may be impractical or unsafe to recommence works at these sites.

Employers who find themselves in this position should first consider whether it is feasible to structure rosters and duties in a way where work can safely and effectively continue at the relevant site during the lockdown period. If this cannot be achieved due to the absence of key workers, or there are insufficient workers available to recommence works, then employers may need to consider continuing to stand down employees until they are in a position to recommence the work. Such a stand down could apply both to employees who are permitted to leave their LGA and employees who reside within a restricted LGA.

Subject to any specific terms of any enterprise agreement and contract of employment, an employee can be stood down by an employer without pay where:

• there is no useful work for the employee to do; and
• the stoppage of work is due to circumstances outside the employer’s control.

It is highly likely that the inability to safely or effectively recommence works due to the updated stay-at-home orders would constitute circumstances outside of the employer’s control.

Support for employees

The Federal Government’s COVID-19 Disaster Payment is available for eligible employees who have lost income due to COVID-19 health orders. Eligibility details can be found on the Services Australia website.

From the week commencing 1 August 2021, the COVID-19 Disaster Payment for employees who have lost less than 20 hours of work in the week will be $450 per week, and for employees who have lost 20 hours or more work per week the payment will be $750 per week.

Employees need to apply directly through Services Australia (see here). Employers should be conscious of circumstances where employees may experience difficulties accessing such entitlements, including with respect to employees for whom English is not their first language, or where employees may not have easy access to online resources. To the extent possible, it would be best practice for employers to provide assistance to employees who may need guidance in navigating the Services Australia and myGov application process in order to obtain the COVID-19 Disaster Payment.

Project finance and other debt facilities

As with the shutdown, the resumption of projects (already distressed) will require participants in the construction industry with any financing arrangements to consider whether the restrictions and soft re-opening measures trigger further disclosure obligations and potential breaches under their debt facilities. 

While it is unlikely that a financier will enforce solely by reasons of the shutdown, as we reported in our last article on the shutdown, some financiers may use the current situations as a justification to stop funding progress payments or pull the availability of revolving credit lines. Any such restrictions on liquidity could make it more challenging to restart or continue projects.

It is therefore important for borrowers to proactively engage with financiers and, if possible, seek confirmation of support and waivers of potential current breaches and any breaches that are foreseeable over the forthcoming period in order to provide comfort should a prolonged lockdown or ongoing restrictions lead to further defaults.

Safe harbour and solvency concerns

In light of the ongoing restrictions, particularly in relation to workforce mobilisation and effective recommencement, directors and businesses need to be conscious of their solvency position and need to monitor their cash flow position, creditors and debtors. 

Businesses that are experiencing distress, whether as a result of the construction shutdown or otherwise, should consider entering (or re-entering) the formal safe harbour regime as prescribed by section 588GA of the Corporations Act 2001 (Cth). Importantly, unlike 2020, there is no moratorium on insolvent trading liability for directors, so directors concerned about solvency should actively consider the choices available to them.

From a high level, the safe harbour regime affords directors protection from insolvent trading when they proactively engage a qualified professional to help develop a course of action or plan to achieve a better outcome. The ‘better outcome’ test is assessed against the immediate administration or liquidation of the company. Further details on the safe harbour process can be found here.

Way forward

This continues to be a difficult time for the industry – construction has shown itself to be the lifeblood of the economy especially over 2020 and this weighed heavily on the state government in taking this major step in the interests of mitigating the long term impact of the pandemic in initially shutting the industry down – and now permitting this ‘soft’ reopening.

In our view, the need for industry specific support from the government is critical. There is a difference between seeking value for money with the public purse versus extracting blood from a stone. The speed at which head contractors and project participants down the chain have fallen into serious distress highlights the pitfalls in traditional government procurement practices and risk allocations which have become the norm on major projects.

Hamilton Locke has expertise across the projects spectrum. We are actively advising project participants on the immediate impact of yesterday’s announcement, and assisting them to take steps today to ensure they survive tomorrow and in the long term through this extraordinary period.

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We will continue to provide further updates on many of the issues raised by the shutdown in the coming days.

Stay safe.