Australian Capital Projects and covid19 - what's your Action Plan?

While the full impact of the covid-19 on Australian construction sector will becoming more apparent in the next few weeks or months, there are lots of questions, discussions (and debates) about the magnitude of potential wide range of impacts and their expected timeline and correlations as well as possible mitigation actions which clients should put in place now. Earlier today, I helped a key client who has just signed a lump sum contract with a D&C Contractor on a major water project – no access to site yet, no force majeure clause in the contract, few long lead items in the schedule and issues associated with productivity rates to name few key issues (not risks anymore) which need to be carefully and systematically assessed for implementing the best strategies in place.

There are many ways to assess the organisation’s risk exposure and while there is no right or wrong answer, it’s important to ensure a comprehensive risk assessment, preferably as quantitative and scenario-based as possible, is undertaken enabling a risk-based mitigation action plan being developed and implemented. The situation, its circumstances and boundaries will definitely change but leading organisations will put processes and action plan in place NOW and will then monitor and update it regularly as needed!

This article is a brief summary of a number of recent notes, discussions and approaches both internally as well as with a number of members of Risk Engineering Society (RES) and Engineers Australia that might be helpful for clients with a portfolio of capital projects. Obviously, the article has a generic nature. It’s aiming to support our industry in Australia by generating further discussions from different aspects, hence should not be used without appropriate review of organisation’s specific requirements, context, strategic objectives and contractual terms and conditions of its project portfolio and deliverables.

Context

• The Housing Industry Association (HIA) estimates that the construction sector employs around $1.1m Australians. 
• According to the ACIF, 60% of the $6bn spent on construction materials is spent on imported materials from China.
• Availability of staff and productivity issues
• The application of covid-19 and its consequences in the force majeure context in Contracts will be an interesting one too. Four possible scenarios have been identified:

o  The Contract contain clauses that make the issue simple to resolve, for example clauses on specific events such as epidemics, quarantine, biological contamination or entry and exit restrictions. Best case scenario

o  The Contract contain clauses including generic phrases such as ‘natural disaster’. It is certainly arguable.

o  The virus does not need to be the direct cause of a force majeure event to be relevant. The force majeure event might be a second order consequence, e.g. ports being closed to ships from certain countries. 

o  In the case of absence of force majeure clause or if its clause does not cover the relevant circumstances appropriately, the concept of ‘Frustration’ which has been recognised by common law might be applicable.

• Having said that all, it should be also noted that, a number of studies of claims during previous pandemic periods, indicated that many of the bad outcomes possibly were not directly driven by the market conditions, but were exponentially increased due to poor project preparation and risk mitigation responses to it. This is a very important lessons learnt!!

Potential risks and range of consequences

• It is expected the highest risk is delay in supply chain for projects, likely production delay of 10% in supply chain. In the worst case scenario, i.e. epidemic could continue till Jun 2020, the impact might be as high as 50% in supply chain.
• It’s not only the risk that materials will be unavailable, but addition risk that materials will be unaffordable and/or with lower quality. However, overall commodity prices were down 1-2% over the last few weeks, with a decline in eight of ten commodities measured.
• Risk to Australian commodities exports to China, mainly iron ore and coal together worth more than $120b billion. Drop in demand from China will have an impact on Australian mining projects.
• Master Builders Association expect growth to remain flat until the end of the year, and negative growth until 2022.
• 2-6 months risk of delay and disruption claims in construction and infrastructure projects – note: Corrs Chambers Westgarth lawyers have already reported the disruption, delay and frustration claims due to absenteeism and difficulties due to damaged supply lines. I am aware of at least three cases of relevant delay/disruption claims which have been recorded in the last two weeks.
• Education and universities: risk of 2-6 months delay to education projects due to current travel restrictions and delay in registrations

Risk Assessment Approach – risk-based Scenario Analysis

The key steps include:

• To review relevant clauses in the Contracts, both existing and future, to ensure the risks have been clearly defined and appropriately allocated. 
• To review the whole supply chain (not just the first level) against key risk sources: Demand Risks, Material supply Risks, Process/Control Risks, Environmental Risks, Relationship Risks, Logistical Risks, Catastrophic Risks
• To develop, facilitate workshops and capture inputs for undertaking a combined scenario analysis, I suggest 3-4 scenarios, against Portfolio/Program/Projects, but it’s important to consider a range of possible consequence ranges, e.g. Best Case/Most Likely/Worst Case, for each scenario
• To facilitate program/portfolio risk workshop to identify and assess project inter-dependencies, program risks, risks with potential impacts on multiple projects, etc.
• To undertake a risk-based Sensitivity Analysis to measure the potential impacts for identification of top risk drivers
• To quantity range of risk exposure and compare it against organisation’s appetite, tolerable and capacity for each risk category aligned with your risk management policy and framework
• To develop an action plan, which may include:

1. To review and improve the planning, controls and reporting measures on procurement and expediting of high risk items
2. Alternative sources for products/services
3. Regular monitoring measures, alternative providers, procurement strategies (e.g. prequalification), additional quality controls, etc.
4. Other contractual arrangements, e.g. I heard some contractors are now seeking suspension of LD clauses from their contract, etc. 

Easy task? definitely not but something that must be done NOW instead of waiting and see approach. I think we are passing the shocking/denying stage and we see more organisations act on their plan ASAP.

More than ever, your views and experiences are welcomed! We are all together on this and should come out of it stronger and more resilient! 

The views expressed in this presentation are those of Pedram Danesh-Mand and do not reflect or represent the official policy, position or recommendation of the KPMG Australia, Engineers Australia (EA) or Risk Engineering Society (RES). Any written or verbal recommendation has a general nature and should not be used for any decision making without further assessment for specific project and organisation requirements.