Construction Industry and COVID-19 Outbreak

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1		Mukhtar A. Kassem	+ 2894 word(s)	2894	2022-01-25 07:00:56	\|
2	update references and layout	Amina Yu	-49 word(s)	2845	2022-02-07 08:17:17	\|

This entry is adapted from the peer-reviewed paper 10.3390/su14031135

construction industry force majeure environment risk risk management COVID-19

1. Introduction

Policymakers need to determine the economic impacts of the COVID-19 epidemic. However, the challenges of the outbreak of the situation at an unprecedented pace have created uncertainty ^[1]. The details of a contract define how the force majeure case will be informed and prescribe the effects of non-compliance, defining whether it has a compulsory or a directory effect ^[2]^[3]. Moreover, environmental and safety-related factors are seen as key risk factors in oil and gas projects. Therefore, failure to comply with health, safety, and environmental standards can result in project suspension at different times ^[4].

An unpredictable occurrence or situation might have a favourable or negative impact on the project’s aims; ref. ^[5] discuss in greater detail the concept of risk, and recommend using a more fundamental concept of uncertainty. Thus, it can be observed that the definition of risk applies to COVID-19, as it represents a state of uncertainty and no one expected it to happen or predicted its impact on public life in general and construction projects in particular. Universal risk management is a process of measuring and evaluating risks and developing strategies for managing them, including transferring risks to others, avoiding them, minimizing their adverse effects, and accepting some or all of their impacts. Based on ^[6], traditional risk management focuses on the physical and legal risks posed by such risks as natural catastrophe or fire, accident, death, and prosecution, while, financial risk management is interested in those risks that can be managed using financial barter instruments.

Risk management is a profession that teaches individuals and organisations how to deal with uncertainty by safeguarding their most valuable assets and resources. Risk management is the practice of avoiding, reducing, or controlling hazards. There should be a balance between the expense of risk management and the anticipated rewards of taking the risk. Systematic risk management is a management method that involves both practical experience and training in its application ^[7].

Beginning in December 2019, the COVID-19 pandemic has subsequently expanded globally. At the time of the initial draft of this publication, the virus had been detected in about 253,640,693 people, and the number is predicted to grow to more than five million. Furthermore, there have been more than 5,104,899 who died as shown in Figure 1. While some governments have successfully handled recognized instances, it is uncertain where and when more cases may emerge. Every day, more instances are recorded and other nations are added to the list, including Arab countries and Malaysia (WHO). However, it seems that Chinese instances have peaked and are currently declining. The reverse is true in Europe and America. The WHO has declared a public health emergency of worldwide significance ^[8].

Figure 1. Global situation on 16 November 2021 of COVID-19 as per WHO report. Source: ^[9].

COVID-19 has had a substantial impact on all business sectors globally, including the construction industry. The outbreak has disrupted supply lines and caused workforce shortages in numerous nations. Construction projects face many kinds of uncertainty challenges due to the various players participating in project planning, project management, and project implementation. Furthermore, the major parties in any project include the owner, designer, consultant, manager, supplier, and producer ^[10]. Many risks in the construction sector cause a direct impact on project objectives, and thus lead to exceeding cost estimates and delayed implementation ^[11]. At present, the COVID-19 pandemic represents force majeure leading to the suspension of most construction projects in the countries where the epidemic has reached.

In fact, as with all contracts both parties are subject to obligations. However, a temporary event may occur that prevents the implementation of these obligations, such as the coronavirus pandemic which has affected most world countries, including the Arab countries and Malaysia. Is this pandemic a force majeure in the field of FIDIC contracts, and if so is this the case for each of the parties to the contract? The beginning of force majeure as defined by the version of Article 19.1 issued in 1999 is an exceptional event outside the control of the parties which one of the parties cannot avoid it, and must fulfill four conditions:

That the extraordinary event(s) were outside the control of one of the parties;
That the parties were not aware of the event(s) before concluding the contract;
That the event(s) took place after any point where the parties were able to avoid or bypass them;
That the event(s) were not caused by one of the parties to the contract.

The incident or scenario need not be unexpected. Other unusual occurrences or situations that may constitute force majeure if they fit the four criteria listed above are listed in Subitem 19.1:

Battle, hostilities, invasion, act of foreign enemies;
Revolt, military or usurped force, or civil war;
Riots, disruptions, strikes, or closures by non-contractor workers, contractors, or sub-contractors;
Contamination by war munitions, explosives, ionizing radiation, or radioactivity, except when the contractor used such ammunition, explosives, radiation, or radioactivity, earthquakes, storms, or volcanic activity.

Many legal concerns in industrial, commercial, and service contracts, financial responsibilities, and associated tax issues are impacted by COVID-19 on a worldwide level. The emerging circumstances may prevent the imposition of fines or compensation for delay in the implementation of these contracts ^[12]^[13].

In its attempt to suppress the COVID-19 outbreak, the Malaysian Government has enforced a Movement Control Order (‘MCO’) in Malaysia from 18 to 31 March 2020, now extended to 9 June 2020 (‘Relevant Period’). The MCO has influenced non-essential job efficiency, including activities at project/building sites where they are needed to interrupt the job during a specific time. Whether the COVID-19 epidemic or subsequent MCO is a force majeure case is a matter of understanding the contractual provisions. Likewise, how the epidemic or MCO impacts the parties’ rights and commitments in terms of timing and costs depends heavily on the regulations of the contract.

According to ^[14], Saudi Arabia’s construction industry has become one of the country’s most heavily invested sectors. As a result, the overall value of Saudi Arabia’s building projects underway as of October 2018 is USD 284 billion. Furthermore, relative to other GCC (Gulf Cooperation Council) countries, Saudi Arabian building programs accounted for almost half of all the region’s construction projects. Therefore, the industry’s success is of the utmost importance due to the massive funds involved ^[15].

The COVID-19 outbreak has had a significant impact on the construction sector, which is generally cyclical. On the plus side, building may provide jobs which can help the industry evolve towards sustainability and digitalization. Tripartite cooperation, social discourse, and international labour rules are critical to a human-centered construction sector revival. According to ^[16], increased awareness of health, hygiene, and safety hazards may lead to safer work practices. Contrary to popular belief, safety leadership is vital to the safe implementation of COVID-19 working principles. COVID-19 should be integrated and promoted as part of a broader risk management approach, in part because this takes into account differing priorities for safety risks rather than focusing solely on COVID-19, and in part because integration with pre-existing safety processes can enhance COVID-19 mitigation effectiveness. While in other research ^[17] shows that the greatest impact of the pandemic has been on construction supplies, construction workers, and construction subcontractors. The fuzzy model’s findings show a large variance in pandemic impacts across the public and private sectors. It was contributed to the body of knowledge by allowing scholars and policymakers to better understand the pandemic’s effect on disadvantaged countries. Ref ^[18] undertook a comprehensive study on COVID-19’s influence on the US construction sector through the Granger causality test and structural equation modelling (SEM) which were employed to establish the epidemic–Pi-C relationship. Another method used was multivariable LSTM networks, a deep learning algorithm, to estimate future Pi-C values. The Pi-C framework incorporated predicted Pi-C indicators in order to analyse the COVID-19 pandemic’s impacts and trends in 2021–2022. The pandemic had an impact on two Pi-C dimensions (economy and stability), though not on the third (social). The Pi-C also anticipated that the pandemic would have no significant negative impact on the US construction industry until 2022. Moreover, ref. ^[19] confirmed that financial assistance and detailed information are required to alleviate the impacts of COVID-19. The researcher believes his findings will help governments revise their present strategic plans and establish new ones to address COVID-19’s impact on building construction organizations.

Ref ^[20], based on 519 publications and 40 AEC practitioners, found twelve separate COVID-19 impacts and polled AEC practitioners on the criticality of the twelve effects. The authors analyzed 127 valid responses using mean ranking, ANOVA, and Spearman’s correlation. The statistics were compared to past pandemic studies. Findings from the survey included “decreased construction productivity”, “decreased foreign investment in the construction industry”, “supply chain disruption”, and “decreased number of public projects”, while “Lower foreign investment in the construction industry” and “lower demand for construction-related services” affected SMEs more than large firms. Supply chain disruption and reduced construction productivity were common results across all countries analyzed, along with lower foreign investment in the construction industry, decreased demand for construction-related services, supply chain disruption, and decreased productivity.

Additionally, ref. ^[21] found that many stakeholders ranked COVID-19’s impact on building projects at 15th. The bulk of COVID-19 effects were connected with construction workers, engineers, and managers. Using correspondence analysis, four relationships were discovered: suppliers and subcontractors, the project team, the owner and construction business, and personnel. These relationships were considered in three dimensions: (1) membership degree; (2) decision-making power; and (3) cause-effect dependence-control.

The respondents noted the following positive themes: reduced overhead costs, remote working settings, enhanced productivity, and sustainability aims. Negative themes mentioned by respondents included poor company turnover, construction payment and production delays, difficulty working from home, and job losses. Lessons learned were related to supply chain management, construction project management improvement, health and safety, and a productive virtual workplace ^[22].

2. Recommendations

Because the construction sector is one of the sectors of greatest importance in the overall economies of these countries and because it affects the rest of the economic sectors and the growth of the gross domestic product both positively and negatively, in addition to being a labor-intensive sector, the disruption of this sector accelerates the transformation of a state of stagnation into a state of total depression which all countries seek to avoid. Thus, it was felt that fundamental policies should be developed in order to help the sector overcome the period of the epidemic while maintaining the integrity of financial relations between companies operating in the sector and between customers, lenders, suppliers and end users until activity recovers, especially given the cumulative negative effects that the sector has suffered. It was found that even if the spread of the virus is contained in the short term, the suffering of construction companies from these effects will continue for several months to come before the construction activity returns to normal, whether in terms of effects on contracts, project delays, or disruptions in supply chains.

While it is still premature to assess the full impact, if the coronavirus continues to have a significant impact after the second wave it will cause significant project delays, meaning that construction companies need to be at the forefront of proactive action. To mitigate those impacts on its business, the impact of the pandemic will appear in all sectors of the construction industry, both operationally and financially.

Some of the operational effects have become evident in current contracts through delays in completion, suspension and termination of contracts, or delays that have crystallized many disputes due to cash demands. In another sector, which is the human resources sector, the negative impact is represented by the availability of manpower due to cases of injuries and deaths, or the costs and incentives required to maintain key skilled cadres. Negative effects in the supply sector are represented by the slowdown in supply from the affected areas around the world as construction projects move at a slower pace than usual during the outbreak of the epidemic due to suppliers facing challenges represented in re-closure, reducing operations, and escalating prices of materials, equipment and labor, which in turn lead to a decline in the use of production capacity. The fourth area severely affected by the pandemic is the work site, where additional expenses are required to maintain the security of closed sites, manage health and safety risks, and project stoppage costs, with materials in these closed sites exposed to natural factors which led to their damage and result in losing required properties.

The financial effects of the pandemic appear in three areas, the first of which is revenue. Canceling or delaying contracts has serious effects on revenue values. The second is working capital, which suffers from severe pressures affecting the liquidity situation. The third is financing; when it takes longer than expected to obtain new supporting capital, financiers question companies’ ability to repay loans on time and risks escalate, causing borrowing costs to rise and exposing financial vulnerabilities which may have accumulated over previous years. In order to confront all these repercussions in a proactive way, companies must carry out assessment and planning work for administrative procedures in these specific sectors. Actions include carefully considering clauses that refer to force majeure, emergency circumstances, government intervention, or legislative changes. Additionally, customers must be made aware that frequent communication with employers is key to managing expectations and reducing negative effects in the management and implementation of projects.

In the employment sector, special care is required in managing personnel costs and participation in the face of business disruption, as during the period of suspension of activity companies must evaluate the process of reducing personnel costs, reducing wages, and compressing expenses; this can be achieved by finding alternatives to cash payment and through good planning, assessing staffing requirements, and working to retain key skilled staff.

With respect to site security (health and safety), during the closure of sites it is possible to take into account the appropriate security measures for sites and the procedures in place to maintain the infrastructure of important sites. In addition to avoiding any risks to health and safety in the short term, insurance policies should be reviewed in detail in order to ensure compliance with all requirements for coverage for closed sites, or if there is a difficulty in that, insurance companies must immediately be dealt with. The speed of the outbreak of the epidemic of COVID-19 and the policy of social distancing followed as a result will continue to have a significant impact on the construction sector around the world, especially in the Arab countries and Malaysia, according to the factors previously mentioned, unless treatment or vaccines are found to eliminate and limit the virus.

Keep a record of those you meet or interact with (name, date, time, and location if possible)
Wear suitable PPE at all times and avoid the use of another person’s PPE outside of life-threatening conditions
Enforce social distancing on all types of business
Health tests and checks should be carried out continuously (know the symptoms and do temperature checks on yourself)
Emergency management plans and medical teams that can respond to on-site emergencies
Set access limits for staff and guests on site
Create a protocol to verify staff when entering or starting work shifts, abide by applicable legislation/regulations, and restrict unnecessary access to the site
Provide a protocol/action to detect symptoms in another person
Establish a detailed protocol for the periodic disinfection of risk surfaces, tools, equipment, plants, and vehicles
Video records for locations and offices may provide contact tracking visitor records
Have a dynastic plan in case you lose a significant person on the team
Provide a one-user protocol for using tools, equipment, plants, vehicles, mobile phones, and keyboards
Develop easily accessible points and provide personnel with hand disinfectants
Create readily available points for disposal of contaminated equipment and used PPE equipment
Continually update and train health and safety officers and security personnel on the complementary site rules and regulations
Constantly instruct staff on supplementary and new regulations
Detailed monitoring of policies and procedures that may be put in place as soon as contact is known to have taken place
Audit of sanitization requirements against chemical sensitivities of equipment
Try to split teams in half in order to limit exposure to critical personnel resources (lowest possible workforce plan)
Create a procedure and apply small tasks where applicable or possible
Provide health insurance for all human resources in the company
Divide lunchtime into shift patterns to minimize staff concentration in designated lunch locations
Provide meals for workers in packages and based on health and safety regulations
Review project members for critical equipment operations and maintenance skills needed at sites
Recognize crucial points of contact within your company that could be disrupted by disease or isolation
Remember to check backup copies taken for essential files, such as financial documents
Frequently conduct healthy verification of equipment before use

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Mukhtar A. Kassem

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1. Introduction

2. Recommendations

References