The Impact of pandemic on Construction’s Supply Chain: A New Risk Profile

The Impact of pandemic on Construction’s Supply Chain: 

A New Risk Profile

Written by David Bowcott at Aon Risk Solutions.

*Editor’s Note: This column first appeared in the March 2020 edition of On-Site.  You can read through the whole issue here.  The information below has been updated as of March 24, 2020.

There are many risks in today’s dynamic construction economy.  Companies deal with issues related to contractual risk allocation, unforeseen ground conditions, faulty workmanship, errors in design and the impacts of extreme weather — just to name a few.  Then, just when you think you have wrapped your arms around these known risk areas, a new one shows up at your doorstep.  It is, after all, the nature of risk to be unpredictable.

This latest risk is a global pandemic severely impacting your supply chain.

Thankfully, organizations like the Canadian Construction Association (CCA) are quick to help the community deal with this fast-growing risk.  On Feb. 18, the industry group aired a webinar titled Coronavirus and Supply Chain Implications in Construction.  The session included three experts in supply chain risk: Peter Kapler of Aon, Cheri Hanes of AXA XL and Andrea Lee of Glaholt Bowles.

I highly recommend you have a listen to it on the CCA website, but if you don’t have a chance to take in the recording, hopefully the following blog will be a helpful summary of what was discussed.

To start the session Peter Kapler provided some sobering facts related to this fast-spreading virus, which the World Health Organization has stopped just short of officially labelling a pandemic.  (The WHO declared it to be a global pandemic on March 11).  The following information is accurate as of March 24, 2020:

• 417,042  cases of Coronavirus (specifically COVID-19) worldwide
• Communicable by direct contact and airborne droplets
• Virus is alive on some surfaces for up to five days
• Aerosol transmission of virus
• Millions of people in strict quarantine with many millions more in partial quarantine
• Shanghai region: approximately 80 per cent of companies did not have workers to restart full-time production
• Inland drivers in China required to quarantine for 14 days and drivers refusing to perform inland trips
• Warehouses, depots and ports in China operating with less than 50 per cent staff
• Oil and base metals currently have dropped significantly from mid-Jan peaks (WTI is currently at $21.25)
• Steel demand down in China by 40 per cent year-over-year
• Hyundai shutting down South Korean lines due to lack of Chinese-made parts
• Apple cuts quarterly revenue and profitability guidance on Chinese demand and production challenges

Responding to an evolving crisis

These are indeed sobering facts and it shows how quickly such a risk can develop and begin substantially impacting economic results.  As was stated in the webinar, the impact to the construction supply chain isn’t a question of “If” but rather a question of “when.”

After that reality check, Cheri Hanes from AXA XL took over, pointing to the regions of the world most exposed to Chinese manufactured goods exports.  Of course, both Canada and the United States import a significant portion of their supplies from China.

Hanes laid out best practices those in the construction community can adopt to minimize the impact of supply chain disruption due to pandemic:

Short Term Actions

• Perform a supply chain audit within your firm to understand how much exposure you have to China
• What is your “Plan B?”  Identify alternatives to Chinese suppliers and move quickly to assess additional costs to change suppliers and the ability of alternatives to meet your demand

Long Term Actions

• Plan for the next supply chain disruption by building a resilient supply chain
• Go from reaction to anticipation to collaboration to orchestration as quickly and effectively as possible

Building off these topics, Andrea Lee from Glaholt Bowles provided an overview of the legal and contractual ramifications of a supply chain shock event.  The key theme of her discussion centred on the triggering of the force majeure clause within construction contracts — both the subcontractor/supplier contracts with a general contractor and the contract between a general contractor and an owner.

Force majeure is a clause found within most contracts allowing one party to the contract to excuse themselves from performance issues.  The criteria under which a party to a contract can excuse themselves include:

• Specified event is beyond control of claiming party
• Event prevents or delays contract performance
• Event makes performance of contract imprudent, substantially more difficult or substantially more expensive
• Event was not due to fault or negligence of the claiming party
• Claiming party has exercised reasonable diligence to overcome the specified force majeure event

Lee went on to expand on the case law related to force majeure events with a focus on epidemic events.

As this pandemic has made clear, risk can manifest quickly and often emerges from areas you least suspect.  As of Feb 19, when I was putting together this column, the Coronavirus crisis is just eight weeks old and has had massive ramifications for the global economy.  Many more are to come — and construction will not escape unscathed.  Be prepared!