Is the construction sector close to crumbling?

COVID-19 RESOURCE HUB | Financier Worldwide

CONSTRUCTION SECTOR

A number of headwinds, such as slowing economic growth and the uncertainty and volatility caused by political turmoil and trade war tensions, had already been battering the global construction sector in the years immediately prior to the outbreak of coronavirus (COVID-19).

However, these headwinds pale into insignificance compared to the damage being wrought on the sector by the current global pandemic. According to GlobalData’s ‘Global Construction Outlook to 2024 (COVID-19 Impact)’ prior to the outbreak, the pace of growth in the global construction sector in 2020 was expected to accelerate to 3.1 percent from 2.6 percent in 2019. However, given the severe disruption to leading economies worldwide due to COVID-19, the forecast for growth in 2020 has been revised down to 0.5 percent.

“While the response of the global construction sector to COVID-19 has largely been effective at ensuring at least some ongoing site activities, there is no doubt that there has been considerable disruption both on site and in supply chains across the world,” says Peter Hall, a partner at Norton Rose Fulbright. “The virus itself has had an impact on the availability of personnel within the manufacturing supply chain – leading to equipment and material shortages and delays in transportation – and on site and among supervision personnel.”

Like all sectors, social distancing and other measures taken by governments to contain the pandemic, such as travel restrictions and visa and work permit constraints, as well as remote working (from contract execution through to dispute resolution) and furloughing of contractors, suppliers and project managers and contract administrators, are taking their toll.

For the moment, the extent of the disruption across the construction sector, as well as its cost, is yet to be fully determined. “This is evidenced by the way in which contractors have, so far, triggered the various contractual protections available to them in their contracts, with a general reservation of rights approach without providing full details of the pandemic’s impact, not least because its effects are still ongoing and are likely to be so for some time, even if restrictions are slowly lifted as the contagion becomes contained,” explains Mr Hall.

In terms of new contracts, these are still being entered into, notes Mr Hall, although a number of projects have been put on hold for the time being. That said, the risks associated with the impact of COVID-19 are being addressed and allocated up front, so far as they can be. For example, the International Federation of Consulting Engineers (FIDIC) guidance document – ‘Coronavirus (COVID-19): FIDIC Guidance for Global Consulting Engineering Businesses’ – is helping to discourage adversarial attitudes between the parties, promoting cooperation, and encouraging prompt payment to maintain cashflow and dispute avoidance.

Overall, as with so many other sectors, responding to the impact of COVID-19 has proven a challenge for the construction sector – a challenge it has risen to, as far as possible. Construction companies are doing their best to adapt to the ‘new normal’ and focus on what they can and cannot do in these difficult times.

“There will be a day of reckoning when the full impact is known,” says Mr Hall. “But, in the meantime, the focus is on getting the job done safely and effectively, with construction professionals from both the contractor-side and the employer-side seeking solutions to the problems they face.”

Over the coming months, the construction sector will need to find new ways of working and manage its way around the various impacts by rescheduling work and adopting different construction and fabrication methodologies. However, all this comes with more cost and less efficiency.

“It will be some time before we can consider a situation as ‘post-COVID-19’,” suggests Mark Berry, a partner at Norton Rose Fulbright. “The effects will be felt some considerable time yet, at least one year, possibly more. In that time, we will see the construction industry change, adopt and adapt working practices that will probably continue, even post-COVID-19. That is, the changes we will see over the next few months may potentially be employed on a permanent basis even if there is eventually a vaccine for COVID-19.

“This is because they will become the new good practice for construction in regard to all virus contagion that regulatory health & safety standards will assume compliance with,” he continues. “We are already seeing contractors adapt their working method statements to take into account the social distancing ‘rules’ which have become de facto compliance standards. However, these rules may not be possible to comply with in practice and good practice will become the adopted principles promoted by construction industry bodies.”

Clearly, the ramifications of the COVID-19 outbreak will continue to be felt by the construction sector, and only time will tell how successful it has been in facing up to present challenges.

Fraser Tennant