Singapore's Construction Sector Post-COTMA - An Opportunity in Adversity?
28 April 2022 28 April 2022
Projects & Construction
This is the first insight piece in our APAC Projects & Construction group’s Road to Recovery Series. Over the coming months we will be exploring some key market and legal developments as the infrastructure sector strains to recover from the pandemic and return to ‘normality’ in a heavily disrupted world.
Singapore adopted an unprecedented, highly interventionist approach to trying to protect the construction industry from the impact of the pandemic via its COVID-19 (Temporary Measures) Act 2020, known as COTMA. The primary forms of relief for the construction sector finally came to an end on 28 February 2022 (for Part 2 and Part 8B) and 31 March 2022 (for Part 10A, although an application for an assessor’s determination under Part 10A can still be submitted until 31 May 2022). To recap, key forms of relief included:
- The moratorium on the commencement and continuation of legal proceedings and the calling of performance bonds, and protection from liquidated or other damages for delay and other breaches caused materially by a COVID-19 event, between 1 February 2020 and 28 February 2022 (Part 2).
- The “universal extension of time” of 122 days for all construction contracts covering a specific period of delay between 7 April 2020 and 6 August 2020 (Part 8A).
- The sharing of certain qualifying costs between employers and contractors that arose from the contractors’ inability to complete works on time – not including manpower costs - where such inability was caused materially by a COVID-19 event (Part 8B).
- The power for ‘Assessors’ to make binding, ‘just and equitable’ adjustments to contract sums to account for the problematic issue of increases in ‘foreign’ manpower costs arising from the pandemic (Part 10A).
COTMA does seem to have played a role in holding at bay any surge in construction industry insolvencies and disputes arising from the pandemic. Singapore’s Accounting and Corporate Regulatory Authority (ACRA) figures show that fewer construction sector businesses ceased operations in 2020 and 2021, after COVID struck, compared to 2019. The Business Times also reported recently that more construction firms were formed than wound up over the past to years.
However, as we previously considered here, the announcement of the winding up of Greatearth – a leading construction firm with a long history in Singapore - in September 2021, despite the protections provided by COTMA, raised some alarm bells, and the pandemic continues to impact the sector in Singapore. In addition to the knock-on effect of China’s ‘zero-COVID’ approach, travel restrictions on the movement of labour, as well as increased health and safety measures, continue to have a significant, albeit more subtle impact, and can in turn be difficult to assess.
It should also not be forgotten that the construction sector suffered from very serious challenges prior to the pandemic. Some of these have been highlighted further by the impact of COVID 19 – the very heavy reliance on manual labour, and transient migrant labour in Singapore, for example. Other issues have been overshadowed by the focus on COVID 19 in recent times but remain, including relatively low productivity, low profit margins, low uptake of technology compared to some other sectors, a relatively poor safety record, and poorly thought though risk allocation in some cases. In turn, it is well recognised that time and cost overruns, and in turn disputes, are far too common.
On top of all of this, the sector is of course having to deal with rising costs and inflation, and the impact of the war in Ukraine.
Uncertainty regarding the impact of the pandemic has obviously abounded but arguably COTMA itself, and the repeated additions to its reliefs and extensions to its periods of protection, has also compounded that uncertainty for some businesses. In turn, some construction firms appear to have taken a ‘wait and see’ approach and have deferred pursuing their entitlements proactively and making other business critical decisions, despite being involved in significantly distressed projects in some cases.
Against this background, and with the protections COTMA offered having recently come to an end, potential trends in Singapore include the following:
- An increase in SOP adjudications: while official figures have not been released, based on our involvement in adjudications towards the end of 2021 – which are numbered sequentially – there appears to have been a decline in the number of proceedings, certainly compared to the 426 adjudications in 2019 as reported by SAL. The fact that adjudication determinations were not enforceable during the period of protection under COTMA was likely a significant factor, in addition to the uncertainty considered above. With adjudication determinations enforceable again, other relief under COTMA no longer available, and some parties looking to make up for lost time and to pursue their contractual entitlements more assertively, SOP adjudication can be a compelling option. It should also be borne in mind that the cost-sharing of qualifying costs under Part 8B of COTMA – as incurred in the applicable period from 7 April 2020 to 28 February 2022 – can still be pursued in SOP adjudication.
- An increase in submissions and assessments of interim entitlements: in some cases, submissions and assessments of entitlements to additional time and money, as well as the levying of liquidated damages for delay, have been deferred given the significant uncertainty arising from the pandemic, and the relief offered by COTMA. Our impression is that parties, including contract administrators, are now more pro-actively pursuing and assessing contractual entitlements, and are starting to take more decisive action to get projects back on track.
- An increase in calls on performance bonds: Section 6(2) of COTMA had prevented the beneficiary of a performance bond from making a call at a time earlier than 7 days before the date of its expiry, but this provision has now expired. Calling on performance bonds or other securities is likely to be another compelling option for some parties post-COTMA. If done at the right time and in the correct manner it can protect a party financially, improve its negotiating position, and mitigate the risks associated with having to recover losses by arbitration or other means.
- An increase in insolvencies and terminations: in some other jurisdictions where parties have not enjoyed such extensive protection from the impact of the pandemic as in Singapore, we have seen a significant increase in cases where a party is simply unable to perform (and, in turn, an increase in the insolvencies and terminations which arise from this). Smaller businesses down the supply chain can be particularly vulnerable and the concern is that with the relief under COTMA ending, combined with the other pressures considered above, this trend may establish itself in Singapore.
Will necessity be the mother of invention?
With the protection offered by COTMA falling away, the onus shifts back to parties’ contracts and relationships when taking steps to get projects back on track and to manage the likely trends considered above.
In some cases, encouraged by COTMA, parties have seen first-hand the benefits of conducting business flexibly and negotiating their way out of tight spots whenever possible, as opposed to shifting as much risk as possible down the supply chain and then strictly enforcing onerous contractual terms, calling bonds or commencing proceedings, for example. We anticipate that this shift in mindset could be a positive, lasting legacy of COTMA.
In other cases, however, the concern is that parties have sat on their hands and suffered from ‘analysis-paralysis’ in the face of extreme uncertainty and the complexity of their challenges, and that the deferring of difficult decisions has actually compounded their projects’ distress. Time will tell.
There is certainly a tremendous opportunity for other positive trends in the construction sector to accelerate in the wake of the pandemic, and in upcoming pieces in our Road to Recovery series we will be exploring some other key market and legal developments in the current climate.
Please do not hesitate to contact us if you would like to discuss any of the issues considered in this article.