Multiple construction projects have been delayed or even canceled – as an impact of the pandemic. Various reasons may cause this issue, such as material and/or workforce shortages, disrupted mobilization, travel restrictions, physical distancing policy, or even suspension of all construction activities.
However, Law 2/17 has mentioned that contractors must conduct their work performance in a cost-effective, right quality and timely manner as referred to in the contract, otherwise they will be subject to compensation. Contractors and/or subcontractors may need additional time and resources due to delays caused by the pandemic. Therefore, the projects may not be delivered as promised and may as well lose productivity and revenue. Both the project owner and the contractor as well as the subcontractor may be facing these challenges. Therefore, it is important to understand the steps and remedies that can be taken to minimize the risks caused by the delay.
Addressing the Risk
The following are common risks that may affect contractors due to delay:
1. Damages Liability
In general, the reasonable response if there is a project delay is to enforce the liquidated damage (‘denda keterlambatan’) by the project owner. Liquidated damage means that it is the project owner’s sole recovery for late completion, and it very common to put this damages liability clause under a contract. It is usually set based on the contract value.
The project owner is also entitled to actual damages such as loss of use of the project and loss of revenue that should have been generated.
2. Cost Escalation
Delays due to a pandemic have the potential to affect the cost of projects, such as the cost of fuel, raw materials or labor rates over the duration of a project. It is typical to put an escalation clause under a contract as a reference for action when unit prices increase. Therefore, it is essential to protect contractors against a sudden and unexpected increase in costs.
Project delays are mainly burdened to the contractor, and the contractor must prove the causality link between the cause (i.e., pandemic) and the effect. This will be a premature action if the contractor expects a relief without elaborating on the actual impact of the pandemic. Therefore, the contractor is legally obligated to mitigate the risk through whatever actions needed. Below are the options to mitigate the risk.
1. Review and Negotiate the Contract
Understand your rights and obligations
The parties should understand each of their rights and obligations as well as their contracting counterparties. It is also important to take a look at several crucial clauses, such as delays and extensions of time, force majeure clause, notice of claims, and so forth.
It is also important to pay attention to any specifics about delay claims when re-analyzing the contract. For instance, questions like “whether they are compensable or not” or “should there be proper documentation for disbursing compensation.”
Complying with Notice and Reporting Obligations
This could be the most reasonable option to take. Delayed project and performance disturbance shall be the evident impact of Covid-19. In general, construction projects commonly obligate stringent notice and other schedule or expense reporting duties on behalf of the contractor.
The reason for giving this appropriate notice is to make the project owner adequately aware of the problematic situation. It is a good faith action that may be pursued by the contractor, and the project owner may properly consider its options and decide on appropriate and reasonable actions.
Not only does it preserve the contractor’s rights to submit a claim, but it will also amplify the possibility to identify potential delays or disruptions in the future and resolve them in accordance with the procedures under the contract.
Consistent, organized and frequent (daily) documentation is vital to quantify a delay claim. If litigation becomes necessary, an organized reporting due to delay circumstances will ease to calculate the time and money in order to advance the delay claim.
Based on a re-analysis of the contract, it may be possible to arrange discussions and negotiation meetings with the counterparties in regard to the terms under the contract. The project owner would normally negotiate the terms that allow the project owner to take over crucial actions to terminate the delay within the contractor’s cost. Whereas, the parties would also negotiate the contract price or insurance coverage.
2. Force Majeure Clause
It is crucial to further examine whether Covid-19 constitutes a force majeure event under the contract. The parties may need to discuss whether the Covid-19 pandemic has caused obstacles for a party to fulfill their obligations under the contract. Further, the element of force majeure can be proven if it is shown that the delay is beyond the control of a party and if such distress is unavoidable even though reasonable steps to mitigate the damage have been taken.
If the force majeure clause is not mentioned under the contract under any specific terms, the parties then may refer to general contractual terms and evaluate whether the effects of the COVID-19 pandemic fulfill the elements of a force majeure event.
The contractor may also need to crosscheck agreements with its subcontractors (if any) since the performance of the project should ideally be an interconnected chain – from material suppliers, subcontractors, contractors and project owners.
3. Seek expert’s advice
Both the contractor and the project owner may seek advice from professionals – they could be an engineer, legal consultant, business and management expert, or so forth. An experienced construction consultant can help project owners navigate the complexities that may arise during difficult times.
Instruction from the Ministry of Public Works and Housing
In response to the pandemic situation, the Ministry of Public Works and Housing has issued an instruction for temporary suspension due to Covid-19 prevention. Under Ministerial Instruction No 02/IN/M/2020 on the Prevention Protocol for Corona Virus Disease 2019 (COVID-19) in the Implementation of Construction Services (“Instruction”), the Ministry sets out that construction services can be temporarily suspended due to force majeure if they meet certain conditions.
There are three matters stated under the Instruction, including the prevention protocol for conducting construction services, the follow-up to enforce construction agreements, and the procurement protocol.
The follow-up to enforce the contract shall cover the following matters:
1) Temporary Suspension Mechanism,
2) Mechanism of Substitution of Specifications, and
3) Compensation for Labor Wages and for Subcontractors / Manufacturers / Suppliers
Construction services can be temporarily suspended due to force majeure conditions if the identification shows that: (i) they have a high risk due to the location of the project being at the center of virus transmission; (ii) they have positive workers or so-called Patient Under Surveillance (‘PDP’); or (iii) the head of ministry/agency/regional government has issued a regulation to suspend activities temporarily due to force majeure.
The Instruction has mentioned that the mechanism must adhere to contract documents. If the contract has not specifically ruled provisions for determining force majeure events and temporary suspension, the mechanism must comply with the provisions stated under the Instruction.
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This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.