Building supply shortages

Consider protection under these legal agreements while we wait for building supplies shortages to return to normal

There are numerous reports of construction projects being delayed due to a shortage of building supplies. This situation is likely to be a feature of the industry for the foreseeable future and clearly has a wide-reaching impact across the industry.

Alongside general supply shortages, we are also aware that some suppliers are imposing minimum volume or value requirements for orders which is limiting some areas of the market to bulk orders only. This is of particular concern for smaller contractors, who may not be in a position to place orders of sufficient volume.

In general terms, it is likely that the risk of supplier delays will fall on the contractor and will lead to the contractor being exposed for the consequences of late project delivery, including liquidated damages.

In this article, we discuss some ways for both contractors and principals to mitigate supply issues. By “principal” we are referring to the client or the client’s agent, such as a project manager or head contractor (in which case, “contractors” refers to sub-contractors).

Costly impact of shortages

At a commercial level, we see contractors stockpiling materials, pooling together to order in bulk, and sourcing alternative products. This may become increasingly difficult as resources become scarce.

There are various contractual provisions which come into play when supply issues are being experienced, including:

• Cost fluctuations.
• Grounds for delay.
• Offsite materials.
• Substitution of materials.
• Variations.

In addition to contractual considerations and principal approval, it may also be necessary to get the approval of the consenting authority for a change of materials to ensure compliance with building consents and the building code, which causes further cost and delay.

Extension of time

Usually there is no specific right for a contractor to claim an extension of time under its construction contract for supply chain delays. In the absence of a specific provision covering this issue, a contractor is likely to be left with seeking to rely on the common extension of time ground of “circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor” (10.3.1(f) NZS 3910:2013).

It then becomes necessary to analyse whether or not supply chain issues were reasonably foreseeable at the time of tendering. Given supply-chain issues are now wide-ranging and have been reported on for some time (eg, Covid-19-related issues were predicted and commented on as far back as when Covid-19 began to emerge and the delays at Ports of Auckland have been reported on since November 2020), it may be very difficult for contractors who tendered post-Covid to be able to successfully argue an extension of time claim under 10.3.1(f).

It is therefore vital for contractors to consider current and potential future supply delays when agreeing a programme for a project to mitigate the risk of late delivery. Contractors should check current contracts to see whether they have supply related delay clauses they can rely on. For future projects, contractors should consider the inclusion of a specific provision (tag) to cover this risk.

Offsite materials agreement

We are seeing a sharp increase in the use of off-site materials agreements so that contractors can try and source as many materials as possible for a project at the earliest opportunity. This is being done partly due to fear of not being able to source materials in the future when they will be required for a project, but also to mitigate against increasing costs.

This can be beneficial to both contractors and principals and is a solution for keeping projects on schedule. However, principals will be exposed to paying for materials earlier than they intended and significantly ahead of the materials being incorporated into a build. Accordingly, it will be dependent on principals having the ability to fund this up-front payment and being prepared to take on this risk. Contractors may not have the cashflow for large stockpiles of materials, particularly where they are working on multiple projects.

To mitigate the risk to principals, the title in those materials should pass on payment and the materials should be clearly labelled as belonging to the principal. The principal can, and should, protect their interest by registering a security interest on the Personal Properties Security Register (PPSR).

 

If you have questions or would like to discuss any of the points raised in this article, please contact Alysha Hinton on (04) 471 9452 or at alysha.hinton@duncancotterill.com, or your local Duncan Cotterill advisor (duncancotterill.com).

 

Duncan Cotterill is a full-service law firm with offices in Auckland, Wellington, Nelson and Christchurch.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.