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Supply chain risks need to be built into construction contracts

by Madelein
Supply chain risks need to be built into construction contracts

Main image: Megan Jarvis and Tyron Theessen, Partners at Webber Wentzel

Supply chain disruptions emerged due to Covid-19 lockdowns in 2020 and were joined by rising inflation towards the end of 2021 and have intensified in the first part of 2022. With the war in Ukraine and the Covid-19 shutdown in Shanghai, disruptions have already worsened for some, and are likely to intensify.

Shortages adding to woes

For example, the shortage of microchips, stemmed from the closure of factories and the rising demand for technology, when employees worked from home.

Another example of shortage has been the availability of steel. Mills shut during Covid-19 and when they re-started, they underestimated the extent of economic recovery, which caused a spike in the cost of certain steel products.

Freight cost increases

The costs and timelines for importing goods have increased dramatically, with a 500% increase in freight costs (https://www.engineeringnews.co.za/article/supply-chain-bottlenecks-here-to-stay-for-2022-goods-prices-to-rise-sharply-cargo-compass-sa-2022-04-06/rep_id:4136)

Covid-19 cases continue to affect the outputs of suppliers, manufacturers and contractors at various levels of the supply chain.

Contractors managing risks

These delays and heightened costs are causing contractors and Original Equipment Manufacturers (OEMs) to seek ways to manage risks and disclaim responsibility for time and cost overruns on large capital projects.

With no immediate prospect of this problem being resolved, contractors that need to procure critical capital items reliant on inputs such as steel, microchips or the logistics chain must consider including additional clauses in their contracts to protect themselves from failing to deliver within anticipated timelines (either through force majeure type provisions or bespoke clauses dealing with their unique risk profile).

It should however be borne in mind that most force majeure clauses contemplate that reasonably foreseeable delays will not garner relief, and contractors and OEM’s relying on these provisions should be certain that adequate provision has been built into their proposals to show that reasonable provision for known risks has been made.

In addition to providing contractual relief, contractors should reduce their reliance on a single critical source of supply and source products closer to home or use local products.

Full acknowledgement and thanks go to https://www.webberwentzel.com/ for the information in this editorial.

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