By Chris McLagan, a partner at Robinson Low Francis, independent cost and property consultants
Spring is typically the time of year when construction activity begins to pick up pace after the cold winter months. However, due to the global Covid-19 pandemic, the Scottish construction industry has instead endured an unprecedented drop in construction output, and seen the majority of Scottish sites temporarily close, leaving many in the industry facing a time of uncertainty.
Since lockdown was introduced by the Scottish Government in March, the focus has been on safely closing and securing sites, workforce wellbeing, home working practices, the adoption of the government’s furlough scheme and general business survival.
Consequently, there has been little dialogue between clients, contractors and advisors concerning the lasting commercial impact this pandemic may have on construction work. As we now approach Phase 2 of the agreed construction sector re-start plan, the so-called soft start, it is certain that commercial and financial matters will soon become the hot topic discussed in boardrooms across the country.
A key commercial challenge facing the industry post-lockdown is the time it will take to definitively establish the full and final consequence of the pandemic on construction contracts that were let prior to lockdown, specifically the impact on construction costs, programme and project business cases. This will be a major concern to finance directors.
Although most contractors are now in Phase 1 of the re-start plan (site preparation), it will take time for contractors to fully understand the consequences of physical distancing on sites and the impact this may have on time and cost. It may well only become fully evident once the industry has reached the final stages of the re-start plan, the timescale of which is currently unknown.
It may also take time for contractors to fully establish the impact of building material shortages caused by reduced supply chain production levels over the past two months. This is likely to be further exacerbated by depletion of material reserves by sites in England which remained operational during Scotland’s lockdown period. Clients and advisors must therefore prepare themselves for the prospect that contractors may be unwilling or simply unable to define the precise impact on time and cost on existing pre-let construction contracts for some time to come.
On 7 May, the UK Government and the Construction Leadership Council published guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency and it is anticipated that many clients and contractors will act responsibly and fairly and will adhere to the guidelines.
However, there is a risk that some parties may not. Poor existing relationships, competing stakeholder interests or individual financial pressures may all potentially result in dispute and litigation.
During the lockdown period, the industry in Scotland has generally operated in a collaborative and open basis, underpinned by good communication and a ‘we’re all in this together’ attitude. It is therefore essential that this level of collaboration continues post-lockdown and that all parties approach commercial discussions with a similar attitude. If not, it is likely that projects may face protracted and costly disputes, further impacting cashflow, jobs and general business recovery.
Significant challenges also exist for projects that are currently in development. The potential cost and time consequences of physical distancing and material pricing levels, as well as general market uncertainty, could adversely impact projects leading to either project delays, postponement or cancellation, neither of which is welcome in the current market.
We expect risk management processes to feature heavily in the pre-development stages of projects over the coming months, providing clients, developers and funders with more informed information on which to base their investment decisions during these uncertain times. In the current climate, a risk management process is likely to offer much greater financial protection than arbitrarily setting aside general contingency allowances to cover for the unexpected.
There are certainly challenging times ahead and it is unlikely that any existing construction contract or project currently in development will be exempt from these challenges. If the construction industry in Scotland believes itself to be collaborative, modern and fair, now is the time to prove it!