Consequences for Project Finance due to COVID-19 Staffing Reductions on Construction Sites
By Michael Zheng & Josh Montebello• 09 September 2020 • 6 min read
During the ‘Stage 4’ lockdown in Victoria, construction sites in the Melbourne ‘Restricted Area’ have not been required to close. However, mandatory staffing reductions for construction sites, imposed by the Public Health Commander’s Workplace (Additional Industry Obligations) Directions (Directions), have meant fewer ‘hands on deck’ and likely delays in achieving practical completion on many construction projects.
Last weekend, the Victorian government announced its Roadmap to Reopening (Roadmap). Among other things, the Roadmap extends the operation of the Directions until 28 September 2020 and imposes ongoing restrictions on staffing at construction sites until late October this year (subject to trigger points and public health advice).
In this article, we discuss the current mandatory staffing reductions and the consequential impacts for developers and project finance below.
A construction site for the purposes of the Directions is a site at which civil works, building or construction activities take place. The only exceptions to the applicable staffing reductions are in relation to:
- ‘Critical and essential infrastructure’, being either:
- construction or maintenance of critical and essential infrastructure where the Victorian Government has deemed and the Chief Health Officer has endorsed that is urgently required for the purpose of sustaining human health, safety and wellbeing, on a case by case basis; or
- activities deemed by government from time to time as ‘State Critical Infrastructure Projects’; or
- construction for the purposes of national security or defence; or
- critical repairs to any construction site where required for emergency and safety.
The applicable staffing reductions otherwise apply depending on the classification of the construction site as either:
- early stage residential land development;
- large-scale; or
Early stage residential land development sites
An early stage residential land development project comprises all civil works undertaken on open air, large greenfield sites associated with and preparatory to construction of multiple individual residential dwellings or industrial or commercial development on that site.
On these sites, worker numbers are restricted to 10 people per hectare at any one time.
A site will cease to fall under this category upon subdivision or once construction of a building, warehouse or physical structure has commenced. Once construction of a dwelling commences on a subdivided site, the site becomes a ‘small-scale construction site’. Once construction of a building, warehouse or physical structure has commenced, it will be considered a ‘large-scale construction site’.
Large-scale construction sites
A construction site is ‘large-scale’ where one or more of the following criteria satisfied:
- it is for the construction of a building where a planning permit has been issued in relation to the site for a building that is greater than three storeys tall (excluding basement levels);
- the site size is more than 1,500m2 in floor size (inclusive of all floors);
- it is for construction of a premises that is predominantly for office use or that is the internal fit out of a retail premises;
- it is for construction of a premises that is predominantly for industrial or large format retail use; or
- it is deemed to be so as above in relation to the commencement of construction of a building, warehouse or physical structure on a site otherwise falling within the definition of an early-residential land development site.
On large-scale construction sites, there cannot be in excess of 25% of the large-scale construction baseline daily workforce or five workers, whichever is higher. The baseline daily workforce for a large-scale construction site is calculated based on the daily average number of workers on the site across the project lifecycle as derived from the site’s resourcing plan as of 31 July 2020.
Small-scale construction sites
A small-scale construction site is any site that is not a ‘large scale’ site or ‘early stage residential land development site’. A maximum of 5 workers at a time (excluding the site supervisor) may work on a small-scale site.
Consequences for Project Finance
Given the current operation of the Directions and extended restrictions set out in the Roadmap, developers should be aware of any delays that may impact project and construction timelines. If construction milestones are affected or will potentially be affected, it is important for developers to review their position under any finance documents which contain obligations concerning construction timing and practical completion.
In particular, construction finance documents usually contain a milestone date as to when practical completion occurs (which is typically 2-3 months prior to the maturity date of the construction facility). Given the staffing reductions, there most likely will be a consequential delay in the works progress which in turn most likely will impact the date of practical completion.
There are also a number of other obligations under the finance documents which may be affected by delays in completing the works on time, including:
- for staged projects, there may be numerous milestones based on practical completion of each stage;
- deadlines for obtaining and receiving planning permits may not be satisfied; and
- target dates for commencing settlements and achieving presales quotas are also likely to be affected.
As a first step, developers should review their existing extension of time regime to understand whether financiers will allow an extension of time without the need for additional consent. In some instances, the financier may have already agreed to certain extension periods. However, these pre-agreed extensions may not be sufficient due to the prolonged period of the ‘Stage 4’ lockdown and the continuing restrictions as set out in the Roadmap.
Some financiers have shown a willingness to negotiate where borrowers have been able to open a line of communication early. In order to avoid the risk of default under a finance document, borrowers (and indeed parties generally) should engage with their financiers early if a request to revise project and construction timelines is necessary. This may even require seeking an extension of the maturity date.
Failure to review and address these issues early may lead to an event of default occurring which can have drastic consequences including additional financing costs and the financier enforcing its security. The obligations to satisfy construction timeframes and project milestones are often “hard dates” which do not give the developer a remedy or negotiation period so being proactive with the financier is critical.
If you have any queries about your obligations under the Directions and Roadmap or need any assistance in reviewing or negotiating your finance documents, please do not hesitate to contact us.
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