The impact of adverse weather events on the construction industry

In August 2017 Hurricane Harvey dominated international headlines as it ravaged parts of the southern United States of America, on its way to becoming the costliest tropical cyclone in history and surpassing the ignominious records set by Hurricane Katrina.¹

As images splashed across our news outlets of Houston highways inundated with water, stores bereft of supplies, and homes destroyed by torrents of water and wind, it was hard not to draw comparisons to Queensland’s recent history with adverse weather events.

Whether it was the banks of the Brisbane River breaking during the 2011 floods, and the $1.5 billion in insurance claims to follow²; the 285 kilometre per hour winds of Cyclone Yasi devastating North Queensland in 2011; or Cyclone Marcia wreaking havoc on the towns of Yeppoon, Rockhampton and Bundaberg and leaving them without power for weeks – most Queenslanders have a lasting image of the effects of the summer storm season.

Background

In our experience, the construction industry is particularly vulnerable to the impact of adverse weather events as the cost of a project is often seriously affected by the amount of time taken to complete the work.  Significant extra time on a project can turn a profitable project into a loss making one very quickly.

Interestingly, the construction industry has been quick to learn the lessons taught be adverse weather events.  The best example is probably the impact on construction methods which were brought about due to the impact of Cyclone Tracy.  When Cyclone Tracy caused significant damage to Darwin, the construction industry responded with significant alterations to accepted construction methods.

Prior to Tracy rooves were generally “held up” by the walls of the building whereas now, rooves are generally “tied down” to the walls.  It is highly probable that these changes significantly lessened the damage suffered as a result of adverse weather events such as Cyclone Yasi.

Although adverse weather events by their very nature cause damage which is unavoidable, preventative action can be taken to mitigate the financial impact of such events on a project.

This article will:

• deal with the practical matters that parties must consider in order to limit the impact of adverse weather events; and
• consider changes that the construction industry might experience over the medium term as a result of the impacts of adverse weather events.

So what can be done?

Participants in the construction industry need to give adequate thought to the impacts of adverse weather events, particularly if the site has particular access issues.

In particular, the parties need to think about the following questions (and ideally, answer them by way of appropriate contractual clauses):

1. Is an adverse weather event likely to result in the intent of the contract being frustrated? (noting that an Australian Standard contract does not general contain a force majeure clause).  If so, how is this to be dealt with in the contract?
2. Who should bear the cost of insuring the half-finished building and to what extent? (principals need to pay close attention to this question, as, contrary to some industry misconceptions, the contractor is not generally required to insure against damage caused by adverse weather events)?
3. Should the contractor be entitled to extra money in the event that some construction work has to be rectified because it has been damaged as a result of an adverse weather event (assuming that it has already been claimed for by the contractor)?
4. Should the contractors be entitled to extra time and/or extra money in the event that the physical work is damaged?  What about if the work is not damaged but if:

1. 1. The site becomes completely or partially inaccessible due to the impacts of an adverse weather event, for example, if a site is only accessible via a particular bridge, and due to flooding that bridge cannot be accessed?
   2. Labour and or construction materials cannot be transported to site or the site is only accessible on a fly in fly out basis and the local airstrip is affected by the adverse weather event?

It goes without saying that a principal’s natural position is that no extra time or money should be payable and the contractor’s position is the reverse.  Ultimately, there is no universally correct answer and these are matters for negotiation between the parties based on their own commercial interests.

Where a particular building is part of a wider project, a principal will need to answer the above questions with an eye to the project as a whole.

In a practical sense, industry participants should ensure that they have a close working relationship with their insurance broker, as this will assist them to select appropriate insurers and policies of insurance.  Whilst most insurers are quick with “boots on the ground”, that is not always the case.  Nor can it be said that all insurers appreciate the impact that delay can have upon a construction project.  In the case of a large project, the cost of delay could prove to be significant.

Finally, leaving aside the contract, we generally recommend that the industry participants adopt a practical approach to issues such as adverse weather events.  Even if a contractor were to sign a contract which prevented the contractor from claiming extra time and/or extra money in circumstances were (for example) it became more difficult to get labour or materials to site, we would generally question the logic of a principal seeking to hold strictly to those rights.  Put simply, what advantage does the principal wish to gain (particularly if the contractor cannot complete the project)?  The same attitude should (ideally) be adopted when the proverbial shoe is on the other foot.

Where to from here?

Over the medium and longer term, we think that the construction sector can expect to see numerous developments such as:

• Amendments to the National Construction Code (formerly the Building Code of Australia) to ensure that completed buildings can deal with the physical stresses associated with adverse weather events.  Such amendments might be focused on the products that can be used in the construction of buildings or they might be focused upon the techniques used to construct buildings.
• Financial institutions starting to attach greater weight to a building’s ability to withstand adverse weather events when deciding whether to finance the construction of a building.  To us, such an outcome seems obvious in circumstances where the financial institution’s ability to properly secure its interests is heavily dependent upon the existence of both the building and the land.

Should you wish to discuss the content of this article please contact Brent Turnbull on +61 7 3114 0123 or Jim Demack on +61 7 3231 1570.

¹Michael Hicks and Mark Burton (September 8, 2017). Hurricane Harvey: Preliminary Estimates of Commercial and Public Sector Damages on the Houston Metropolitan Area (PDF) (Report). Ball State University. Retrieved November 1, 2017
²Geoff Easdown (31 January 2011). “Queensland flood insurance claims top $1.5b”. Herald Sun. Retrieved 6 February 2011.