Analysis of Impact
Tendering / contract drafting / pre-contract execution
1. Risk allocation
Principals should consider (or reconsider) the most appropriate risk allocation for the proposed project, noting that previously adopted positions may not be suitable in the ongoing climate of uncertainty. This may extend to reconsidering the delivery model proposed, country sourcing of key supply items or personnel, time frames for delivery of key milestones, delivery risk, and arrangements for advance payments.
2. Contractual terms
Principals and contractors may consider expressly addressing the impact of COVID-19 in contracts by:
- specifying the contractor’s entitlement (if any) to extensions of time (EOT) and associated costs as a result of delays caused by COVID-19. Specific consideration may be given to both direct and indirect or consequential impacts;
- including a force majeure provision which addresses the impact of COVID-19 and the consequences of any prolonged impact (e.g. re-negotiation of terms, termination and cost consequences). One key challenge is to identify a sensible period after which a contract can be terminated;
- drafting the change in law provisions to expressly address whether relief (time and/or cost) will be available for the following (and to what extent these events need to be foreseeable):
- changes in law made in countries outside Australia; and
- directives by bodies like unions in relation to the performance of works; and
- the impact of COVID-19 on the contractor’s work health and safety obligations.
3. Tender evaluation
Principals and head contractors should give increased focus to:
- the financial capability of the party submitting a tender;
- labour availability (including key personnel) and how resources would be replaced in the event that they cannot work;
- the proposed supply chain; and
- the proposed project program.
4. Supply risk mitigation
Principals and contractors should consider whether risk mitigation can be achieved by:
- reconsidering supply chains based on current and anticipated status. For example, with Chinese suppliers gradually returning to full manufacturing capacity, they may in fact be better placed to fulfil supply orders compared with suppliers in other countries which are behind on the virus trajectory;
- distributors will be under increasing financial pressure as delivery terms stretch out and cash-flow is impacted, so consider whether direct rights to step-in or novate ultimate supply agreements is warranted to protect against insolvency mid-way through the supply chain;
- if advance payment is required for long lead time items, obtaining unconditional security for the cost of those items to hedge against the risk of non-delivery and insolvency;
- reassess your practices in relation to registration of security interests on the PPSR. While often not used, the heightened risk environment is a context to potentially engage this additional layer of protection; and/or;
- alternatively, a principal may want to manage this risk by procuring items directly itself.
Principals may wish to explore whether there are suitable insurance products, such as delay in start-up (DSU) insurance, available which may mitigate time risks for a project to some extent.
As with all contracts executed in uncertain economic times, the way in which performance will be secured should be carefully considered.
Given the typical security provided by bank guarantees is unlikely to cover all of the costs incurred in respect of a major breach, significant delay or insolvency, other forms of security should be considered, including parent company guarantees.
7. Warranties and defects
Separate deeds of warranty for key items of work should be sought from subcontractors and suppliers to provide recourse in the event of head contractor insolvency.
8. Principal’s discretion
Where a contract is already on foot, or otherwise does not allow for adequate contractual remedies (including those referred to above), the Principal should consider whether it should exercise its discretion to:
- grant a unilateral EOT to enable the contractor an opportunity to complete the project without the threat of impending liquidated damages for a failure to complete the works by the required completion date due to delays which are outside of its control; or
- direct that the impacted works become a separate stage / separable portion under the contract to enable the contractor to progress the works which are not impacted and to minimise the overall delay to the whole of the works.
With delays to the supply chain, suppliers and contractors may require a longer period to deliver supplies or complete their work. This in turn may impact their cash flow if payments are only made on completion or at particular milestones.
Principals may wish to consider increasing payment frequency to their contractors, or offering to pay subcontractors directly, to mitigate the risk of subcontractors and suppliers across the project supply chain becoming insolvent. Such changes to approach are often best dealt with formally.
If there is applicable insurance such as DSU insurance, parties should seek advice from their insurance broker in relation to policy requirements (as well as observe any applicable contractual requirements).
11. Arrangements with financiers
Projects which receive funding from external financiers are likely to be subject to further requirements. Parties need to be mindful of such contractual arrangements, including whether suspension of work may be default events or triggers under financing agreements / financier side deeds.
12. Insolvency and ipso facto
With a heightened risk of insolvency, all parties should be aware of the rights they can and cannot exercise in relation to insolvency events, in particular having regard to ipso facto laws and their impact on the right to terminate or exercise other rights in the event of insolvency.
13. Dispute resolution
The contract usually provides a starting point for the dispute resolution process parties need to follow in the event of a dispute.
Courts and tribunals may be closed as part of any broader shut-down and arbitrators or experts may have more limited availability which may cause further delays in seeking a resolution to disputes. Early engagement and preparedness to resolve issues early may be more critical than ever given things are not ’business as usual’.