We need to focus on what we can control – right now we have identified five key actions, says Alinea’s Steve Watts
No one knows how bad this will get.
It does feel like it will worsen before it gets better, and in the short-term there are real potential added costs on current projects – we already have examples of procurement of components having to switch from China and other places, to “safer” sources, with a price premium because of the more expensive source, together with a potential delay.
Contractually, the situation is very dependent on the particular circumstances of projects and their contracts. For construction pricing, the main concern is not only that the flow of materials could be restricted but also that the quarantine of people may impact on the ease of doing work – we are only at the start of this latter impact.
In terms of the provenance of materials, we have heard anecdotal comments that while components may not be sourced from, say, China, smaller elements of the same components might be – even screws. The complexity of modern supply chains means that full and accurate answers on where materials are sourced could take some time to clarify.
What is clear is that any imported end products or obvious parts could be subject to delays, either because the product could not be made due to shutdowns, or issues with transit between countries. In these cases, scarcity could put pressure on prices or encourage longer lead-in periods.
Teams may decide to find an alternative source, which could mean retendering, ushering in price increases or delay penalties
A key question will be whether complete supply chains can be re-established quickly. In some cases, teams may decide to find an alternative source, which could mean retendering, therefore potentially ushering in price increases or delay penalties.
There is also a risk regarding labour shortages as companies take the precaution of quarantining their workforce until such times as they see fit, with the effectiveness of homeworking dependent on whether you are a consultant, a manager or a contractor, among other factors.
Longer term, it is impossible to know what the wider economic impacts will be. At the moment, markets are in turmoil and that is bound to continue until the peak of the pandemic has passed.
As ever, we need to focus on what we can control, and right now we have identified five key steps that should be taken to help protect those responsible for construction projects:
- Determine the construction contract position on projects
- Ensure risk management strategies are up to date
- Materials sourcing – where possible, seek alternative supplies and materials from other areas to avoid the risk of delays. Understand the source of materials and any impact with regard to cost, time and quality to the project. Considerable due diligence emphasis should be put into this.
- Write appropriate provisions in contract preliminaries/general conditions – so that reasonable precautions are taken to prevent the spread of diseases, and that the full supply chain is detailed in terms of all suppliers, subcontracts and sub-subcontracts, for the sourcing of all materials, parts, components and products.
- Care needs to be exercised in the valuation of progress payments – particularly for materials off-site
Steve Watts is a partner at Alinea Consulting