International Engineering Construction Post-Pandemic: What Might it Look Like?
It is perhaps premature, but at least optimistic, to consider a world ‘post-pandemic’. The dust is slowly starting to settle on the disruption caused to international engineering construction projects, and works are recommencing. Now is a good time to pause for thought. Will the industry return to something like pre-pandemic ‘normality’ or is there an opportunity for change?
There is reason to hope the pandemic can be a catalyst for transformation. The industry has long since identified the need to change; engineering construction is inefficient, projects are often completed late and over-budget and fundamentally it remains a dangerous sector in which to work. Various industry groups have been discussing for some time the need to evolve in order to make projects safer, more efficient and more profitable. Engineering construction was and to a significant extent remains trapped in its ‘traditional way of doing things’. In contrast to developments in sectors such as manufacturing and aerospace, the way in which engineering construction projects are carried out has not evolved significantly in the last 20 years.
However, the way in which engineering construction projects are carried out 20 years from now is likely to be very different. A silver lining of the dark clouds of the pandemic may be a wider awakening of the need to bring in new ideas and new ways of working and a desire to challenge the ‘traditional way of doing things’.
There are a host of technical developments that have potential to lead to transformational change, particularly for an industry coming out of the pandemic forced to adapt to a new world—for example digital twins, Advanced Work Packaging (AWP), lean construction/integrated project delivery, digitization and a move to ‘assembly’ rather than ‘construction’.
In terms of engineering construction disputes, rather than providing fertile ground for conflict, the pandemic has shown parties that collaboration is a viable alternative to disputes. Specifically, the pandemic has demonstrated that a change in the adversarial mindset is possible. There are a few reasons for this.
Contracts did not have the answers
The major industry standard form contracts (and the amendments commonly made to them) were not set up to deal with a pandemic and its effects. Very few contracts specifically provide for what happens to the project in the event of a pandemic or epidemic—particularly in terms of the practical implications and associated time and cost impacts.
Parties therefore took matters into their own hands. This often revealed a mismatch between what ‘felt right’ and what the contract permitted or allowed for. Some parties took action they considered to be responsible and reasonable at the time but which contractually transpired to be precipitous, whereas others did not but contractually found themselves in a better position. We were asked by our clients which clauses of their contract applied both in relation to the pandemic itself and its impacts in terms of extension of time and financial compensation entitlements. There was often no single answer.
The major standard form contracts allow contractors relief in terms of the obligation to complete the works by the completion date for events such as force majeure and changes in law (applicable for jurisdictions where the law did actually change—some national governments implemented existing emergency powers, for example). However, contractors have found that obtaining financial compensation for the delay and disruption caused by the pandemic is an extremely hard road, if not impossible. Without the owner having breached the contract or having taken precipitous action that prevented the contractor from carrying out the works, rights to financial compensation may be non-existent.
Collaboration trumped disputes
Given the unsatisfactory contractual position, parties were well advised to look outside the contract for a solution. We encouraged our clients to discuss with their contract counterparties alternative proposals, on a without prejudice basis, aimed at finding workarounds that could be formalized by side agreements or contract amendments to specify what would happen to the project in response to the pandemic—for example whether there was to be a site shutdown and if so for how long—as well as what would happen in terms of compensation. While agreeing extensions of time proved relatively uncontroversial, resolving the issue of financial compensation proved much more difficult. We explored some of the difficulties in a previous article.
While generally owners were in a strong contractual position (the financial impact of the pandemic effectively being a contractor’s risk) some owners recognized that this was an exceptional event and that contractors could not be expected to bear the financial brunt of a halt in activity and also be expected to return to complete the works as originally planned. Recommencement of the works required, at minimum, the implementation of public health measures on-site, re-programming and re-sequencing—a substantial logistical challenge.
Some owners therefore agreed to work collaboratively with contractors and agree upon financial compensation—recognizing that ultimately they had to buy-in to the solution rather than protest about the problem in order to be sure that the project could be completed at all, accepting it would be later than expected.
COVID-19 disputes lacked utility
At the outset of the pandemic, we advised our clients that proceeding to disputes over COVID-19 was not recommended. Arbitration or litigation resulting from COVID-19 is unlikely to have any real winners. A pandemic is not a situation where one party is at fault and the other is not, or where one party is more at fault than the other.
In May 2020, the UK Construction Leadership Council published best practice guidance advising the construction industry not to become “embroiled in costly and long-running disputes over the effects of COVID-19 on projects” and instead to “engage in collaborative discussions to try and resolve such issues as and when they arise”. Further information can be found here.
It is hoped that this moment of collaboration is not temporary, and that it continues to be a greater feature of engineering construction as the industry moves out of the pandemic and embraces the technical changes required to make projects safer, more efficient and more profitable. If there is a bright side, the pandemic has shown the potential for collaboration as a meaningful alternative to disputes.
If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
‘Doing the right thing’ is at the heart of Freeths. Find out more about our excellent client service and the strong set of values that guide the way we work.
Talk to us
Freeths are a leading national law firm with 13 offices across the UK. If you have a query about our services or just want to find out more, why not give us a call?
Contact: 03301 001 014