A country divided: Alert Level differences and New Zealand’s construction supply chain

The Delta variant’s arrival in New Zealand has resulted in a range of novel issues impacting the construction industry.  The latest has arisen due to the interregional differences in Alert Levels.  While Auckland remains at Level 4 until at least 11:59pm on Tuesday 14 September, from 11:59pm tonight, the remainder of New Zealand will move to Level 2.

The majority of the country was able to restart construction projects in Level 3, and a move to Level 2 will mean that all projects in those areas can theoretically be back up and running.  This gives rise to a constrained supply of materials between regions, as the majority of domestically-manufactured building products are manufactured in Auckland.  This is problematic for supply of materials between Auckland and the remainder of the country, as materials are not able to be sent from Auckland unless they are deemed ‘essential’.

So what logistical and financial challenges will the construction sector face due to these alert level differences?

Impact on the supply chain

This is an unprecedented situation for New Zealand.  For the first time, we are grappling with the commercial capital of Auckland being at Level 4 while the remainder of the country is at Level 2.  While the rationale underpinning the public health response from the Government is understood, the commercial impact of this has not yet been fully explored.

Under the COVID-19 Public Health Response (Alert Level Requirements) Order (No 10) 2021 (Order), at Level 4 businesses must close, unless the business is an ‘Alert Level 4 business or service’ and is ‘operating in compliance with the Alert Level 4 requirements’.  ‘Building, construction, and maintenance services’ is one of the exempted categories, if these services are required for one or both of the following:

  • to address immediate risks to health and safety; and/or
  • for nationally important infrastructure.

‘Nationally important infrastructure’ means infrastructure that enables or supports supply chains that are needed for one or both of the following:

  • to provide for the current needs of people and communities; and/or
  • to enable or support the recovery of the whole or any part of New Zealand from the effects of COVID-19.

A further exemption applies to any entity with statutory responsibilities for building and resource consenting that is necessary to enable the building, construction, and maintenance services.  The Ministry of Business, Innovation and Employment (MBIE) website provides continually updated guidance on what construction work may and may not be undertaken at Level 4, accessible here.

For the construction sector, this means only projects or works that support essential services can operate and supply and trade can only be provided to those projects or works.  This means that many of the suppliers and manufacturers based in Auckland cannot supply their goods and services to the remainder of the country while Auckland remains in Level 4, unless captured by the change.  This is causing concern in the construction industry, where there is already a shortage of materials (including because of the impact of delays in global trade/shipping, which we recently discussed here).  If Auckland remains in Level 4 longer, there is a real risk that construction projects in the remainder of the country will be significantly hampered due to lack of materials.

MBIE is taking a strict approach to applications for an exemption for construction projects and work to operate in Level 4 and testing each application against the criteria.  Therefore companies will need to critically assess their applications to MBIE to ascertain whether it has a prospect of success.  That said, if there is a supply chain that is critical for ongoing construction, there is a broader power to get an exemption from the Director General of Health under the Health Act 1956 which could be exercised with the lens of this being a public health response.

Imminent change signalled

To counter the concerns, the Government announced today that it intends to allow some building product manufacturing to take place in Auckland during Covid-19 lockdown to support continued residential construction activity across New Zealand.

While the change to the Order has not yet been made, the Government has signalled that it will allow for the manufacture and supply out of Auckland of plasterboard, gypsum plaster and coated roofing steel.  This work must be undertaken with the minimum number of staff safely required and must be conducted in accordance with Level 4 rules.  The change to the Order to enable this to happen will be made over the next 48 hours, and MBIE will interface with the construction companies who are eligible to undertake this work.

Contractual implications – whose risk is this under the contract?

For projects mid-way through completion, contractors affected by supply delays should check the terms of their contract.  The starting point is considering whether they are entitled to recover time and costs resulting from the Level 4 in Auckland while the remainder of the country was in Level 3, and then Level 2 from tonight.  Establishing the value of the claim will be complex, and depending on the terms of the contract, will likely require contractors to show that any additional costs claimed have been caused by Auckland being in Level 4.

For those parties negotiating contracts now, as there is potential for another lockdown, it will be important to consider whose risk (both in time and cost) a delay to supply chain should be and consider whether the contract should specifically address this risk or the standard conditions are sufficient.  If time is critical for a project, in order to reduce the risk of the impact of supply delays parties could consider structuring works in order for the majority of the materials to be supplied and/or manufactured before works start on site, instead of progressively during the project.

Where to from here

At this stage, it is hard to get a handle on how long Auckland will remain in Level 4.  The longer it is kept in place construction across the country will be affected, particularly because there is not the stock available as there was in previous lockdowns.

It will be interesting to see far how the amendment to the Order goes in terms of addressing the issues faced by those in the sector, both within Auckland and in the remainder of the country.  However, with the Government’s focus firmly on the public health response, these practical and commercial issues will continue to affect the construction industry.

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