Following the Government’s announcement on 27 March 2020 (and later enacted into law by the Health Act 1947 (Section 31a - Temporary Restrictions) (Covid-19) Regulations 2020) (the “Measures”) all construction projects engaged in non-essential construction services were required to close. Construction projects engaged in essential construction services were permitted to continue. A list of what constitutes “essential” and non-essential” projects has been published by the Government. Unsurprisingly, the Standard Form Public Works Contracts (“PWC”) do not specifically cater for pandemics and there was uncertainty in the industry regarding a contractor’s entitlement to additional time and costs under the PWCs as a result of Covid-19.
On 14 April 2020, the Office for Government Procurement (“OGP”) issued updated guidance to Employers and Clients using the Public Works Contracts and the Conditions of Engagement for projects impacted by Covid-19 (the “Guidance”). On 22 April, OGP published a model form supplemental agreement for use to make an ex gratia payment to contractors. This note summarizes the Guidance. The Guidance applies to public works contracts only, but it may inform how the private sector will deal with the similar issues being experienced in the private sector.
Construction Contracts – Standard Form Public Works Contracts (PWC)
The OGP advised the following with respect to projects engaged in essential and non-essential works:
Essential Works: The Measures permit essential projects to continue in compliance with HSE guidelines and so the pace of work on essential works will be unavoidably slower. Other issues such as labour and material shortages may also impact the progress of the works. In these situations, the OGP refer parties to the delay provisions already in the PWCs and advise them to work within those contract provisions to manage any delays to the Works, highlighting the early warning provisions and the ability of the Employer’s Representative to request proposed instructions. The Employer may consider, in consultation with the Contractor, whether adjusting the period between interim payments would be beneficial in assisting cashflow.
Non-Essential Works: Those sites that have had to close are most affected by the Measures. The OGP provided the following guidance in respect of these projects:
- Interim payments
Employers should ensure interim payments for works carried out as at the date of closure are up to date. As site visits are not possible during this time, the payment could be an estimate based on previous interim payments verified by alternative means agreed with the Contractor.
The PWCs already provide for events of delay. Item 15 of the Schedule, Part 1K provides for an extension of time to be granted to the Contractor where the Works are delayed by “order or other act of a court or other public authority exercising authority under Law”. The OGP advises the parties to work within the applicable conditions of contract with respect to the notification and management of delays arising from the Measures. Due to the “exceptional circumstances currently facing contractors” the OGP go one step further and advise that the extension to time to be granted the Contractor under the PWCs should be treated as having commenced on the date the site was required to close (28 March 2020) rather than from the date of the change in law (being 8 April and the implementation of the Health Act 1947 (Section 31a - Temporary Restrictions) (Covid-19) Regulations 2020).
The PWCs do not entitle a Contractor to recover costs for changes in law. The OGP advises that employers will make an ex gratia payment to the Contractor for the period of the site closure. The “Applicable Period” for the purposes of calculating the ex gratia payment is from 12 April to 4 May. The Guidance does not state why the Applicable Period is over 2 weeks later than the date from which the delay event is deemed to have commenced (from 28 March), however it may be because only a portion of the costs are to be covered by the Employer. Also, the Applicable Period ends on 4 May and so the ex gratia payment does not seem to include additional costs which may be incurred by a Contractor once sites reopen in adjusting its working practices to comply with health and safety guidelines. We understand the Guidance will be updated by the OGP as public health measures are updated by the Government and such updates may address slower rates of working once sites reopen.
The OGP emphasise that the ex gratia payment does not constitute an admission of responsibility on the part of the Employer for such costs or alter either party’s rights or duties under the Contract or create a precedent.
The ex gratia payment will be in respect of a portion of the contractor’s preliminaries (e.g. costs associated with insurance premiums, maintaining security of a closed site, performing on-going health and safety obligations) where unavoidably incurred, reasonable and vouched by the Contractor. The Guidance contains a formula to assist parties in calculating the appropriate payment and expressly excludes certain items from the ex gratia payment such as a bond premium and any allowance for profits and overheads.
The amount of the ex gratia payment is determined at the prerogative of the Employer. In order to avail of the payment, Contractors are asked to make their records and all relevant material to vouch for permissible costs available, including providing a complete and full break-down of the tendered Contract Preliminaries on a transparent and “open book” basis. Parties should work collaboratively in agreeing the ex gratia payment and, once agreed, the amount of the payment must be recorded in a supplemental agreement. The ex gratia payment should then be included in the Contractor’s next scheduled interim payment.
- Supplemental Agreement
The model agreement is in the form of a letter to be exchanged between the Employer and the Contractor.
The Contractor is required to give some warranties relating to the cost information provided to the Employer including that the ex gratia payment does not cover any costs already addressed through the Government’s Temporary Covid-19 Subsidy Scheme. If there is a bond in place, evidence is required from the bond provider that it consents to the agreement.
The agreement makes provision for claw back of the ex gratia payment if the Contractor breaches the terms of the agreement. While the Contractor is not required to waive any claim under the contract in connection with the Public Health Measures or the related Regulations, if such a claim is successful, the ex gratia payment will be deducted from any amount determined to be due to the Contractor.