Following a visit to a WestConnex site by three COVID infected delivery drivers, the NSW Premier shocked the $60 billion construction industry when she took the unprecedented action to shut down the industry across Greater Sydney. Whilst there are strong assurances that this shutdown will be limited to two weeks, the knock-on effects could last months and even be terminal for some builders. Here we discuss the key impacts of the shut down and recent legislative changes on the sector and what construction companies can do to limit the impact.

What has happened

The announcement, made on a Saturday to take effect on Monday, was unexpected and created a hive of activity, as contractors rushed to secure sites and ensure they would remain safe for the duration of the shutdown. Getting sites back up and running to full capacity will not be easy, with some large builders estimating it will take three to four weeks to get sites fully operational again.

The delay will likely see a long-term increase in contractual disputes, with definitions of extension of time and force majeure clauses varying in most construction contracts and no clear guidance to date from the Government on this. These disputes could be protracted and take years to resolve.

Disputes over contractual delays may be further exacerbated due to the recent supply chain issues which resulted in widely reported materials shortages in the first half of the year. Catch up deliveries will now require storage and/or changes to delivery with sites closed creating further logistical challenges. This will impact construction companies of all sizes in all sectors.

Lockdown follows legislative changes

Residential developers face additional challenges as they will also need to consider The Design and Building Practitioners Act that came into effect on 1 July. The new legislation imposes more stringent requirements for licencing, sign-offs and declarations which may cause separate delays for developers who haven’t prepared.

Delays may also be caused by the Building Commissioner using his broad power to review projects and issue rectification or stop work orders on non-compliant sites. Given these pressures, we expect to see higher levels of stress in small to mid-residential developers.

What is the impact?

The industry was already experiencing a cash crunch prior to the shutdown. The high growth environment following successful COVID stimulus, including HomeBuilder and record infrastructure spend, resulted in many contractors needing additional working capital to fund new projects. This was compounded by a backlog of COVID related rent and tax deferrals that now require repayment, and supply chain issues that are pressuring margins and cash, with many contractors forced to either pay a premium or in advance to secure supply of scarce materials, particularly timber.

The construction sector was one of the biggest beneficiaries of JobKeeper and, as a result, the last twelve months has seen record low construction sector insolvencies. With JobKeeper now unavailable, companies will need significant cash reserves to be able to take the productivity hit of continuing to pay employees who can’t work on sites.

How to protect yourself

Whilst cash reserves cannot be built overnight, there are some simple steps that construction companies can take to put themselves in the best position when construction activity resumes:

• Stress test your trading forecasts: Ensure you have a robust trading forecast and model how shutdown could affect project delivery. Be aware that there may be a staggered return to full productivity and run scenarios on the differing site capacity levels (e.g. 25%, 50% capacity).
• Make a plan: Engage with customers, subcontractors and suppliers early and continuously and work together to ensure projects can be re-started as quickly and efficiently as possible.
• Understand your cash position: Assess cash at a project and portfolio level and critically evaluate assumptions. If funding is required, engage early with your lenders.
• Get your house in order: Use this time to ensure all administrative matters that can be dealt with by staff at home are up to date. This may include collating evidence for outstanding claims, preparing documentation for upcoming certifications and critically reviewing your outstanding WIP and debtors.
• Manage staff morale: Employees at home with little to do can quickly become demotivated and suffer adverse mental health implications. Regular communication and check-ins are essential to maintain morale and think creatively on how staff can continue to contribute to the business.