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Construction Update: Covering the Cost of COVID-19 Related Site Closures

01 May 2020

The closure of the vast majority of construction sites in accordance with the COVID-19 Regulations[1] has raised many questions regarding a Contractor’s right to additional compensation.

In an attempt to address the disruption to the construction industry caused by the COVID-19 crisis, the Office of Government Procurement (OGP) has published helpful guidance on how parties to standard form PWC contracts can agree ex gratia payments to offset the burdensome costs resulting from pandemic-related site closures. The payment aims to cover the Contractors' preliminaries unavoidably incurred and reasonably vouched for the duration of the site closure. The OGP has also published the text of the Supplemental Agreement to be entered into by the Parties.

How will the agreement be reached?

The Contractor must notify a claim under the existing contractual conditions. In addition to determining the claim under the existing conditions, the Parties can agree a sum of money to be paid for some of the costs for the period of site closure. The Contractor must provide a complete breakdown of its Contract Preliminaries on a transparent basis and make available all relevant records, supporting and vouching material. 

What costs are covered?

A formula for calculating the ex gratia sum is provided in the guidance note published by the OGP. It is based on the breakdown of preliminaries in the pricing document of the accepted tender. Initial site set up costs as well as all items deemed as consumables, or not required during the period of site closure will be deducted from the total preliminaries figure for the purpose of assessing the ex gratia sum. A percentage of scaffolding will be allowed depending on the stage of construction. Large items of plant and machinery that need to remain on site for the period of closure are included in the calculation of the ex gratia sum as are 50% of the aggregate of permissible supervision items.    

What period does the payment cover?

For the moment, it covers the period from 12 April to midnight on 4 May 2020.    

How will this agreement be recorded?

The OGP has published model form wording for the Supplemental Agreement to be entered into between the Parties. 

When will the ex gratia payment be made?

The payment will be made on the next interim payment date following execution of the Supplemental Agreement. In circumstances where the Employer is entitled under the Contract to withhold payment from the Contractor, these rights will also apply to the ex gratia payment. 

Does it affect other rights under the Contract?

The terms of the Supplemental Agreement are in addition to the rights and obligations of the Parties under the Contract. However, the terms of the Supplemental Agreement provide that where a Contractor subsequently makes a claim relating to the COVID-19 Regulations, the claim would be reduced by the amount of the ex gratia payment. In addition, it is provided that in the event that a subsequent claim is determined at less than the amount of the ex gratia payment, the Contractor would have to refund the difference to the Employer. 

Conclusion

There is still a great deal of uncertainty surrounding the implications for construction projects arising from the necessity to close sites during the pandemic. These latest actions by the OGP give some clarity to those operating under a standard form PWC contract. The welcome guidance affords them an opportunity to reach agreement at least for the costs relating to the period of closure. It is in both parties interests to fully engage in the process to try and reach an agreement. If both parties engage in a transparent way and in the spirit of co-operation, it should be possible to reach agreement that will alleviate the need for subsequent claims, at least for the duration of the closure. 

For more information on navigating the complex and novel issues arising as a result of the COVID-19 crisis, contact a member of our Construction team.


The content of this article is provided for information purposes only and does not constitute legal or other advice.


[1] The Health Act 1947 (section 31a – Temporary Restrictions (Covid 19) Regulations 2020

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