On 30 September 2021, the relief period under the Covid-19 (Temporary Measures) Act will end, which may lead to many SMEs facing financial distress and affecting the sector at large.
Contractors in Singapore may face contractual disputes next month as the temporary relief provided under the Covid-19 (Temporary Measures) Act is set to end on 30 September, reported The Straits Times (ST).
The Act, among others, provided relief should contractors be unable to perform their obligations under contracts entered into before 25 March 2020 due to the pandemic.
It also placed a temporary pause on the calling of performance bonds, which is a type of security generally used in building and construction contracts. These bonds are issued by a bank or insurance company to a developer to guarantee the project’s timely completion by a contractor.
“These performance bonds typically secure up to the value of the project, so a call on the bonds will typically be financially deleterious for the contractors and sub-contractors,” said lawyer Keith Han, Partner and Co-head of the Restructuring and Insolvency Practice at Oon & Bazul, as quoted by ST.
Han expects claims and legal proceedings brought by, as well as against, construction firms to significantly increase if the relief period is not extended. He also sees more calls on performance bonds.
Lawyer Daniel Tay, Partner at Chan Neo, expects more developers and contractors to file claims against each other in the event disputes are not resolved privately.
“I would not call it a ‘legal tsunami’, but there are already signs that some litigation is coming with contractors preparing for contract disputes when reliefs end,” he said as quoted by ST.
“Payments may perhaps already have been held back (by developers) from contractors in anticipation of such disputes. The same applies to a main contractor and its downstream sub-contractors,” he added.
The deluge of contractual disputes may see many small and medium-sized enterprises (SMEs) facing financial distress.
This may affect major construction projects as well as the construction sector at large, with the extent of the impact depending on the degree of forbearance extended by creditors like financial institutions and banks.
“At the very least, though, we may see some delays in projects caused by key sub-contractors going bust,” said Han.
The COVID-19 pandemic has significantly affected the construction industry, with many firms struggling with reduced cash flow, acute manpower shortages and increasing construction costs, which include rising salaries of workers, foreign workers levies and building material prices.
Salaries of workers, for instance, has increased by 10% to 50% as firms compete with a shrinking pool of manpower, while the foreign worker levy increased from $90 per month before May to $250 for the period between May and end-December.
Prices for key building materials like copper, steel and aluminium have also increased since March 2020, with steel prices surging by almost 40% per tonne.
Meanwhile, Minister in the Prime Minister’s Office Indranee Rajah described the Act as a temporary legislative measure aimed at addressing an immediate problem. As such, future contracts should address uncertainties within risk allocation arising from pandemic events, she said.
Indranee, who also serves as Second Minister for Finance and National Development, revealed that a workgroup that is being led by the Building and Construction Authority (BCA) has been looking into the standard construction and consultancy procurement contract provisions and would be announcing recommendations as well as new contracting practices for public sector construction tenders.
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Cheryl Chiew, Digital Content Specialist at PropertyGuru, edited this story. To contact her about this story, email: cheryl@propertyguru.com.sg.
