When projects are delayed due to labour shortages

home, Hong Kong 01 Apr 2014
When projects are delayed due to labour shortages

A Fine Line on Extra Time.

The construction market in Hong Kong continues at a steady pace, but there’s still the question of manpower and what happens when projects are delayed due to labour shortages.
Last year the Development Bureau put forth a Technical Circular (Works. No. 5/2013) that declared a mandatory Special Condition of Contract (SCC) to delete part of a provision in various sets of the General Conditions of Contract (GCC), which “disentitles a Contractor to an extension of time if the cause of the delay is a shortage of labour”.
This Circular effects tenders for works contracts of all categories including capital works contracts, term contracts and design and build contracts, invited on or after 15 August 2013, and states that “the Contractor shall not be entitled to an extension of time (EOT) if the cause of the delay is a shortage of labour”.
Construction Post (CP) asked both the Development Bureau (DB) and a veteran industry consultant (VIC) questions about the EOT circular.
CP: Can the Bureau elaborate on background and purpose of the circular?
DB: The construction labour market remains tight with the unemployment rate staying low at 4.1% in the last quarter (October to December 2013).  Amid this market condition, the industry is facing an increasing demand for construction manpower as well as aging and skill mismatch problems in coming years.
Contractors find it a great challenge to engage an adequate and competent workforce in completing works projects in a timely manner especially under the current provision in the General Conditions of Contract (GCC), which expressly disentitles the contractors to an extension of time (EOT) if the cause of the delay is labour shortage.We promulgated the SCC to lift this embargo by deleting the related part in the GCC.  Upon the incorporation of the SCC, the Contractor may be entitled to an EOT if the engineer considers that the delay brought by labour shortage is a case of special circumstances.
VIC: Two things come to mind: Firstly, the challenge for the contractor to demonstrate that he has suffered delays due to worker shortage. In practice this is could be very, very difficult, as generally it will be necessary to link cause and effect.
How will the contractor demonstrate that his particular contract has suffered from worker shortage? How do you prove worker shortage? And what are your obligations in respect of trying to mitigate worker shortage and do you have to prove that you have attempted to mitigate this? Then, how do you demonstrate the effect of worker shortage?
Secondly, this only offers the possibility of an EOT due to worker shortage. What about the costs of prolongation arising from such worker shortage? As I see it, the prolongation costs remain at the risk of the contractor.
CP: Since the circular went into effect for all tenders on or after 15 Aug 2013, has DB’s works departments received any claims for EOT?

DB: The incorporation of the new SCC is at an initial stage. No EOT claim due to labour shortage has been received so far.
VIC: This concession is applicable only to tenders invited on or after 15 Aug 2013. This is a slap in the face for those contracts invited to tender before this, as their construction period could be just as long, if not longer in the case of some major infrastructure projects, as those projects invited for tender after that.

CP: Given the general shortage of labour, does DB foresee a flood of claims due to worker shortage? And, what type of work would contractors see as the greatest opportunity to take advantage of this circular?
DB: The Contractor’s entitlement hinges on whether the shortage of labour is a case of special circumstances rather than a general situation.  It is the responsibility of the contractors to substantiate their cases of recruitment difficulties, notwithstanding reasonable efforts, in meeting the demand for skilled workers of particular trades with regard to the construction methods and programmes of individual contracts.

Therefore, at this stage, we do not foresee a flood of claims due to labour shortage nor do we speculate on the type of works that may be caught by the special circumstances.
We would also wish to highlight that the aim of granting an EOT is to compensate delays actually incurred. Contractors are granted an EOT according to the terms of contracts.

CP: How would the DB’s works departments accurately assess if the contractor’s claim has merit and is not a smokescreen to cover up mistakes or bad management caused by the contractor?
DB: There is no difference between the claims for an EOT and any other claims.  The engineer/architect (E/A) will assess any claims based on the terms of contracts and applicable contract laws/doctrines with due consideration of the particular facts of individual claims and justifications provided by the contractors.

In general, the E/A will identify and ascertain the events leading to any delay having regard to the programme at that time. The E/A will also assess the quantum of delays that are not due to the default of the contractors or their failure to take reasonable measures to avoid and mitigate the delays.

VIC: The cause of the current labour shortage is solely due to government’s procurement policy. There is no reason why the current bunching of contracts could not have been spread over a longer period and, in particular, commenced earlier at the start of 2000 when Hong Kong’s construction industry was on its knees due to the government’s policy of not spending on capital works.

While it may be enticing to say that contractors could be tempted to use this government concession to cover up a contractor’s own bad management, the reality is that if you do not have sufficient labour, your project will not progress, and if this is your argument, then the government may ask why.
What happens if the main contractor or the key subcontractors offer wages or terms and conditions which are less favourable than other projects, and they can’t easily attract labour? Should they be granted an extension of time under that circumstance? Would the fact that contractors are not prepared to enter into a bidding war to secure or retain labour be viewed as bad management?

Personally I think that what this government concession will do is create an opportunity for further disagreement between contractors and the government, as to what constitutes satisfactory evidence of an EOT entitlement arising from labour shortages.
It will certainly be good for the dispute resolution industry – but will it help contractors?  I have my doubts, unless the government comes up with an acceptable formula (like contract price fluctuations) to measure labour shortage and its effect. Otherwise the government and contractors will spend a fortune trying to prove their respective points.

M. Johnston with research by Danny Chung

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