State of the construction industry in the face of the pandemic, and claims for relief under contracts.

Stephen Natoli is a partner at Holding Redlich in the Construction & Infrastructure Group and has over 15 years' experience in the legal industry.

Constantine Mimigiannis is a senior Construction and Infrastructure lawyer at Holding Redlich.

The construction industry in Australia is in a state of flux given the impact of the pandemic and changes in structural factors affecting residential and commercial construction, which were materialising even prior to the pandemic.

Whilst there are some signs of recovery of the construction industry across Australia, it remains to be seen how the pandemic will permanently affect the macroeconomy.  A significant disparity in the national economy can be seen in Victoria (and most notably metropolitan Melbourne), which from 5 August 2020 has been operating at reduced capacity of approximately 25% of the usual workforce for large scale construction.  This will continue until at least around mid-September, when the ‘stage 4’ lockdowns are due to end.  Those sites that continue to operate in Victoria face additional costs and logistical inefficiencies of managing heightened safety risks and additional administrative burdens imposed by public heath directions.

Economic and legal stimuli to assist in the recovery of the construction industry are however on the horizon, including a multi-billion dollar scheme contemplated at the federal level in respect of residential construction, on top of the existing ‘homebuilder’ stimulus, temporary insolvency relief for financially distressed companies, changes to asset write-off provisions and other measures.  It remains to be seen whether these and other state-based stimuli will be sufficient to avoid a significant structural contraction.

The recovery of the construction industry is also affected by the allocation of risk under construction contracts, most of which were drafted without a pandemic in mind.  As between principals and contractors, the party that bears the risk of pandemic-related events depends on specific contractual drafting.  Where contracts provide relief to contractors for changes in law, costs and time associated with mandated shutdowns of the economy are likely to be claimable from upstream parties.  Claims in relation to reduced efficiency attributable to workplace safety standards required by existing law (but in the face of new risks), supply chain interruptions, administrative cost overruns and the cost of other day to day difficulties associated with the pandemic are less likely to be claimable by contractors under construction contracts. 

This remains relevant currently and in the near future where principals and contractors alike face costs caused by factors other than mandated shutdowns to the economy.  Construction contracts prepared of late tend to include more specific drafting to capture this more nebulous category of costs.  Principals and contractors should take the opportunity to astutely review existing and new transactions to ensure an optimal allocation of risk suitable to current and emerging conditions.

For those parties engaged in government contracts, the Victorian Government has suggested that it will adopt a flexible approach to contractual interpretation based on individual project characteristics.  It remains to be seen whether this approach will be taken.

What is clear, however, is that the construction industry is highly significant to the national economy and state and federal governments have an interest in securing a strong recovery.