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The Potential Impact of COVID-19 on the Construction Industry

19th March, 2020

As the news of COVID-19 broke from China in late January, one of the first images broadcast to the world was of the hospital in Huoshenshan being constructed in a ten day window. Whilst this hospital in itself is an astonishing feat of construction, and an example to the world of how a vast number of people can come together to achieve a goal that would ordinarily take years to make a reality; it would spell the beginning of a worldwide epidemic that would bring much of the global construction industry to an abrupt halt. Countries including China, Italy, Germany went from being fully operational to in total lockdown in a matter of weeks, with UK recently following suit.

This unprecedented event could have all sorts of implications on the worldwide construction industry, but particularly the UK industry which has been close to pre-recession production levels in recent months.

Key considerations

Everyone will be affected.

There isn’t another industry in the world with the supply chain dynamic of the construction industry. One project stopping on-site can have a trickle down effect on hundreds of businesses. Architects, Quantity Surveyors, Main Contractors, Door Suppliers, Paint Suppliers, Plant Hire Companies, Joiners, Electricians, Decorators, Labourers. The list is truly endless.

Design Team members such as Architects and Quantity Surveyors will more than likely have pre-contract work to complete when the industry shuts down for the pandemic, but builders and tradesmen face a hugely uncertain period of time with sites closing, which could see many going to the wall. If the lay off lasts any longer than a couple of months it is likely to begin to have a negative effect on design team members up and down the country too.

However, there is a positive way for companies in a fortunate position to look at this. The carrot is firmly dangled in front of construction businesses who were reaching pre-recession levels of work prior to this outbreak. If the crisis drags on for several months all the work on-site will still be there when the economy starts up again, and not all companies will be able to survive 6 months of down time. This means that in an already under-staffed industry there will be even more work falling on fewer companies, who will be ideally positioned to capitalise.

A crisis like this has never been seen before, and probably won’t be seen again in this lifetime.

As this is an unprecedented and previously unseen event this could make significant changes to the industry going forward, particularly in a legal setting.

The big issue that will undoubtably rise from this matter is a clear debate around the parameters of loss/expense claims, extension of time and what qualifies under the parameters of Force Majeure.

“Force majeure – unforeseeable circumstances that prevent someone from fulfilling a contract”

Sites across the country have all been halted with immediate effect. This has never happened before and it will be interesting to see the approach taken to dealing with this issue contractually. There are obvious implications around contractors prelim items such as site hoardings, scaffolding, plant hire etc. which have all had to remain in-situ after the abrupt halt to work.

One would assume there will be a blanket acceptance of extension of time claims but I would imagine a project to project basis may be required in dealing with loss/expense claims.

This also poses issues as the crisis is inevitably going to bankrupt some main contractors, sub-contractors and even some clients. Events like these on a mass scale could be enough to destroy a large section of the UK construction industry.

The bottom of the supply chain will always suffer worse than the other parties.

The trickle down effect of the construction industry is highlighted at its worst during these unprecedented incidents. Contractors may be in delay of receiving payments from clients, sub-contractors are then in delay receiving payments from main-contractors, raw material suppliers are also in delay of receiving payments from all parties. If at any stage in the supply chain a party becomes insolvent, every single party below them in the supply chain will have to shoulder the loss, and risk going under themselves.

This will undoubtably throw up more questions than answers around the construction industry payment problem which has been circling for a number of years. Is there a better way to handle payments than paying the main contractor all of the money to re-distribute to the various parties?

What will happen when this is all over?

This is very difficult to predict, and there are potentially two very different outcomes.

  1. The industry plunges into another recession where the amount of construction is scaled back temporarily, adding more stress to businesses that will have been hit hard by a long lay off during the pandemic.
  2. The industry receives an immediate bounce, with the amount of work immediately back to pre-pandemic levels or an even greater amount with people being increasingly open to spend their money again.

One certainty is that public spending will have to be immediately scaled back in the aftermath of this pandemic. The financial measures of paying employees 80% salaries is estimated to be in the £50 billion per month region, let alone the rapid short term increase in healthcare spending.

The private sector is much harder to predict. If the period of layoff for the pandemic is short then the potential is there for everything to continue as it left off on a growing trajectory. However, any sort of long term lockdown could see the entire industry plunged into another recession.

A concerning time for everyone involved in the construction industry.

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