COVID-19: Government guidance for public agencies in the Construction sector

Two weeks into the Government-imposed countrywide lockdown (the Alert Level 4 Lockdown), we have seen a flurry of activity in the construction sector as Contractors and Principals grapple with the commercial, legal/contractual and practical challenges associated with the lockdown and COVID-19 more generally.

The construction sector will play a lead role in kick-starting the New Zealand economy when the Alert Level 4 Lockdown is lifted. However, the way in which the sector is positioned coming out of this lockdown is likely to dictate the level of success that can be achieved moving forward. These sentiments are reflected in the Construction Sector Accord’s COVID-19 Response Plan for the construction sector issued on 5th April, which sets out a ‘3 Phase’ plan to ‘maintain, restart, and transform’ the construction sector (View the Accord’s Plan here).

As was suggested in the Accord’s COVID-19 Response Plan, and in recognition of the intrinsic role that Government plays in ensuring the construction industry remains viable and can bounce back after the COVID-19 restrictions are lifted, on 7th April the Ministry of Business, Innovation and Employment (MBIE) issued the attached ‘guidance note’ for public sector agencies dealing with contractual implications associated with the Alert Level 4 Lockdown (the Guidance Note).

The Guidance Note addresses three key areas:

  1. The contractual position under NZS3910:2010 (in relation to clauses 6.7 and 5.11.10);
  2. Payments and cash-flow; and
  3. Consideration of additional hardship.

Key areas

1) The contractual position under NZS3910:2010 (in relation to clauses 6.7 and 5.11.10)

In order to facilitate a coordinated response across public sector agencies, MBIE’s Guidance Note addresses two of the key clauses being debated in the market, namely 6.7 (the ‘suspension clause’) and 5.11.10 (the ‘change in law clause’) of NZS3910:2013.

In relation to clause 6.7, MBIE has not provided Government’s view as to whether a suspension of the Contract Works has “become necessary”. Instead, the Guidance Note recommends that, where a suspension notice has been issued by the Engineer, government agencies should be discussing with their Contractors the implications of a suspension continuing beyond 3 months (the initial trigger date for a potential termination by a Contractor).

While MBIE did not provide a view on the suspension question, MBIE has provided Government’s interpretation of clause 5.11.10, being:

“…whether the Engineer has issued a suspension notice under 6.7.1 or not, the Contractor will be entitled to a variation under 5.11.10 as a result of new laws and regulation recently made relating to COVID-19. Any increase in costs arising from a change in law under 5.11.10 is treated as a variation, much the same way as a suspension instructed by the Engineer under 6.7.1 is treated as a variation.”

The Guidance Note provides that, on this basis, a claim under clause 5.11.10 is to be treated in “much the same way” as a suspension instructed by the Engineer under clause 6.7.1.

2) Payments and cash-flow

In response to the issue of lack of cash flow within the industry, MBIE has said that public agencies “must consider the mechanisms they have to mitigate the risks and associated additional costs of delayed remobilisation”. This includes considering approaches such as:

  • forward ordering
  • payment in advance / prepayment
  • faster payment cycles
  • issuing purchase orders for costs incurred
  • interim payments
  • possible early release of retentions or performance bonds

MBIE has said that such an approach will avoid uncertainty of entitlement in the immediate term, if it is treated urgently and carried out as a matter of priority.

3) Consideration of additional hardship

Finally, MBIE has said that “agencies should consider whether additional extra-contractual financial relief is warranted and in the public interest for Contractors who have been affected by COVID-19”.

MBIE is currently developing processes which will facilitate the receiving and approving of requests for special relief by Contractors, and for collecting information from agencies on payments to Contractors. Again, this step is an attempt by Government to help Contractors get through this period of volatility and make it out the other side with a workforce and the financial resource to ‘pick up the tools’ again.

What are the implications of the Guidance Note – for the public and private sector?

The Government has an ongoing and long-term interest in the viability and success of the construction sector including for reasons that Government is the largest procurer of works, materials and services in New Zealand. It is therefore important that Government adopts a consistent, coordinated and long-term approach to addressing the effects of COVID-19 on the sector. We consider that the Guidance Note is an important step in this direction and we’re already seeing some agencies giving effect to MBIE’s recommendations. NZTA, for example, is allowing Contractors to claim ‘advanced entitlement payments’, enabling Contractors to be paid in advance for claims that they have under their contracts (view here).

However, in its current form, the Guidance Note would seem to only guide public sector Principals rather than bind them. It is also not binding on Principal’s / developers in the private sector. The private sector is made up of a diverse range of participants facing differing circumstances – some Principals / developers have a long-term interest in the industry, some are only around for specific projects. Some projects are financed, others are funded off a balance sheet. Private sector projects do not have the same political overlay tying the private sector together, and therefore the response from the private sector will naturally differ and will need to respond to the specific circumstances faced by those Principals / developers. For some projects, we are seeing commercial approaches being adopted similar to those recommended by MBIE (for example prioritising the processing of variation claims and paying full P&G costs during the Alert Level 4 Lockdown), whereas others are necessarily adopting a more contractual/legal response (for example, by advancing a different interpretation to that of Government as to the application of clause 5.11.10).

We are likely to see more guidance coming from Government and industry bodies on how to approach the effects of COVID-19 in our sector. While the next few months will continue to impose commercial, legal/contractual and practical challenges, it is encouraging to see high-levels of engagement within the industry as to the resolution of such matters.

Join us on Thursday 9 April for an interactive panel and Q&A session where our leading industry specialists will address some of the key legal and industry issues facing construction companies and their workforce. Click here to register.

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