Contractors incur extra costs and face delays due to Covid-19

Builders call for introduction of standardised contracts and fear that project owners may not take responsibility for additional risk

DUBAI, UNITED ARAB EMIRATES , April 08 – 2020 :- Construction workers wearing protective face mask in Dubai Internet City in Dubai. Dubai is conducting 24 hours sterilisation programme across all areas and communities in the Emirate and told residents to stay at home. UAE government told residents to wear face mask and gloves all the times outside the home whether they are showing symptoms of Covid-19 or not. (Pawan Singh/The National) For News/Online/Instagram/Standalone
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Contractors are facing delays and additional costs in completing ongoing work and are concerned about their ability to mitigate some of the risks they are facing as a result of the Covid-19 outbreak.

Although construction in the UAE has been deemed a vital industry during the lockdown, allowing work on sites to progress, contractors have told The National they are facing additional time and cost pressures.

This is not just an issue confined to the UAE alone. Last week Moody's Investors Service said projects globally "will face increased operating difficulties during the coronavirus outbreak associated with staff absences, reduced supply of materials and more onerous workplace practices".

Some project companies and their clients "are discussing temporary relaxations of parts of the performance regime or payment mechanism, or both", the ratings agency said.

“We are seeing clients suspend projects – we have had several projects suspended. We have had some clients say, ‘we’re not suspending but we’d be really happy if you guys slowed down’, and we have other clients who are outright telling us, ‘where you were going to bill us $100 this month ... we want you now to make sure you are going to cap this at $50’,” says Bishoy Azmy, chief executive of Dubai-based Al Shafar General Contracting.

However, in terms of making up the additional costs incurred, “neither of us has broached the topic”, Mr Azmy says.

“We’re all recognising that this is quite a global thing. It’s not anybody’s fault. It’s not like the client defaulted, or I defaulted.”

Bishoy Samy Edward, chief executive of Dhabi Contracting, says his company is continuing to work around the clock “with my full force” of about 10,000 workers.

“I’m paying salaries for these people and they need to work so they can get paid – the same for me,” he says.

“I cannot afford putting 2,000 people idle in the camps and pay them nothing. There’s no law saying you can put people in camps and pay them no money. It would be a big problem,” he says.

Contractors have taken precautions to prevent the spread of the disease. Rules have been introduced, such as limiting the number of workers travelling on buses to and from sites. Typically, buses carry about 60 workers but this has been limited to 20.

“Either I make more trips, which will cost me more, or I just get more buses and transfer everyone at the same time. This is what I am doing because I have a huge fleet of buses. However [that] means more fuel [and] more drivers’ salaries,” Mr Edward says.

He has written to clients detailing the extra costs being incurred and requesting their support. He also said social distancing can be impractical on some sites, especially in city centres where footprints are tight and rest areas are small.

The UAE Construction Industry Think Tank, a body co-ordinated by lender Mashreq and industry title MEED, this month called for the introduction of standardised contracts.

A white paper produced by the organisation says contracts are currently written by project owners, meaning the majority of risk in the delivery is borne by the contractor.

The introduction of a standardised construction contract tailored for the UAE could benefit the $710 billion (Dh2.6 trillion) pipeline of projects that are planned or underway by restricting bad behaviour and reducing disputes, the paper states.

Dubai, United Arab Emirates - August 4, 2015.  Bishoy Azmy ( CEO - Al Shafar General Contracting LLC ) at his office.  ( Jeffrey E Biteng / The National )  Editor's Note; Michael F reports. *** Local Caption ***  JB040815-Azmy06.jpg

The additional pressures contractors are facing as a result of Covid-19 has brought this matter to a head, Mashreq Bank’s global head of contracting finance, Mohammad Khader Al Shouli, says.

“I believe there will be a lot of requirements for time extensions, variations and delays without penalties. If that doesn’t really materialise or there is no collaboration on it, I think people will resort to those specific paragraphs in their contracts where force majeure is mentioned,” he says.

Force majeure is a concept in most countries with a civil law code, including the UAE, which will be incorporated in most “construction contracts of any sophistication”, explains Thomas Wilson, a partner at law firm Squire Patton Boggs. In general, it covers an event that “prevents the contractor’s performance of its obligations”.

“Contractual force majeure clauses may cover circumstances such as Covid-19,” says Nesreen Osman, a construction advisory and disputes partner at law firm Pinsent Masons. “Generally, these clauses can excuse a party from its delays but may not allow it to recover additional costs.”

Other contract provisions could help with cost recovery, though, Mr Wilson says.

“In civil law jurisdictions, including the UAE, the law includes provisions for exceptional public circumstances causing performance of a contract not to be impossible but to be extremely burdensome financially. In which case courts or arbitration tribunals can adjust the burdens to the parties to a more reasonable [level]. That’s an interesting provision of the law that will be used when the dust settles, but it is not going to be applicable in all respects and it is not a panacea,” he said.

"Generally, these clauses can excuse a party from its delays but may not allow it to recover additional costs."

One measure that should be avoided, according to Mr Al Shouli, is the withdrawal of performance bonds, which are sums contractors have to provide at the outset of a contract that typically serve as open-ended guarantees.

“Those instruments need to be now tackled with caution and with care,” he says. “Today, you cannot use them to pressure a contractor or to agree to certain changes or discounts that you used to do in the past because it puts so much pressure on the system, and on the contractor. I believe that a lot of contractors will not be able to survive [withdrawal of bonds].”

The heads of three major Abu Dhabi government branches - the Department of Economic Development, the Department of Municipalities and Transport and the Department for Culture and Tourism – held meetings with business owners and investors in a number of industries to discuss the impact of Covid-19, including the contracting sector. They heard concerns from contractors about the importance of keeping funding flowing to projects and calls for regulatory consistency, the departments said in a statement on Sunday.

"The challenges faced by the contracting sector and their companies in these circumstances makes us more adamant to increase our cooperation and efforts with all strategic partners concerned to reach immediate and more effective solutions and presenting proposals for quick and more impactful measures that revitalise the sector in the short term, while contributing to enhancing investor confidence in the national economy in the long run,” said the Department of Economic Development's chairman, Mohammed Al Shorafa.

Mashreq's Mr Al Shouli says the lender is continuing to extend support to contractors in terms of financing projects that face cashflow disruption and pointed out that in some instances – especially for many government-related projects – payments are being accelerated.

“We used to get within 60 days of certification, now we are getting within 20 days of certification."

However, he says non-essential spend – for acquisitions, or anything not related to projects – is being discouraged.

One of the most pressing issues for contractors currently is repatriating workers whose contracts have ended, given that some countries have temporarily closed borders even for returning nationals, and flights are unavailable.

“Now, a lot of our workforce aren’t even able to go home,” ASGC's Mr Azmy said. “If that’s for two weeks, maybe we can shift them to other sites that are working. If it’s a month maybe we can shift them a little and pay them some of their paid leave. But if it’s three months, obviously we’re not going to be able to take that huge cost ourselves and we’re going to be looking for help either from clients or government. We don’t really know.”