Flooding: Why cities in Southeast Asia need to be more resilient

by Anisa Pinatih

Construction, like many sectors, is facing unprecedented turmoil in the current pandemic situation. Now, with the ever-changing uncertainties and government regulations to momentarily halt projects, contractors are facing even bigger challenges. Although risk management is a complex task that involves legal or client-specific risk mitigation, this has become a crucial matter to look at, now more than ever, with the widespread implications of COVID-19, especially in terms of performance bond claims.

Supply chains are disrupted, leading to difficulties in material procurement or increased prices. Labour supply and movement are limited. The longer-term impact on the economy might even put owners’ financial assurance in jeopardy. However, resilience is needed to sustain businesses. Government policies are being put in place to assist the industry, in emerging and developed economies alike, because the construction development is a major contributor to each country’s GDP.

In Indonesia, for example, infrastructure construction remains a priority in 2020, with budget being increased to US $26 billion. Malaysia has also planned to boost its construction through its Budget 2020. Likewise, construction demand in Singapore is expected to remain strong and reach up to S $33 billion. With such a central role in the economy, construction industry players must be able to navigate their way through the difficult situations.

What we can learn so far is expect the unexpected. Contractors need to take into account unforeseeable events such as the COVID-19 pandemic in their contracts. 

WHAT ARE THE KEY CONTRACT CLAUSES TO CONSIDER?[1]

Force majeure: This is usually covered in a contract as part of delay clauses. Unpredictable events such as earthquake, terrorism or virus outbreak may be expressed explicitly in a contract. Even if it is not, contractors are still entitled to relief because this is beyond their control. The clauses should allow for an extension of time. Compensation may be claimed, such as when the owner refuses to grant extension, forcing the contractor to accelerate their work.

Escalation clauses: This allows a contractor to receive an increase in its contract price if costs go up under circumstances described in the clause. If the contract is cost-reimbursable up to a guaranteed maximum price, the contractor should not agree to it at this time without including an exclusion that allows for a claim if costs increase beyond the base.

Change-in-law clauses: This can be useful to protect against unforeseen policies over the course of a project. Ideally, the contract definitions should provide a broad definition of law to include not just laws and regulations, but also actions taken by government officials, such as when they order a city to go under a lockdown.

Construction workers wearing face masks to avoid the COVID-19 transmission; image by Blue Planet Studio/Shutterstock

Mutual waiver of consequential damages: Contractors may waive its rights to recover consequential/indirect damages suffered by the owner, especially if the owner’s profit/loss is foreseeable, such as when the virus outbreak was declared a global pandemic by WHO.

Owner’s duty to provide adequate assurances of financing: Evidence of adequate financing to complete a project is commonly recorded in a contract. However, longer-term impacts of unexpected situations such as the virus outbreak may jeopardise the owner’s financing. A contractor may want to exercise its right to seek for documentation that ensure the continuation of its project.

Emergency and safety clauses: With social distancing practices in place, it is impossible to work in cramped spaces. Contractors may want to consider various ways of addressing this, for example, by building temporary shelters with good ventilation. This may qualify for a claim under the emergency clause.

WHAT SHOULD CONTRACTORS BE CAUTIOUS OF?

The propositions in key clauses above may be able to protect contractors from the unforeseeable circumstances. However, they should be cautious of the fact that courts tend to have a narrow view of what can be considered as force majeure. Causation must have three conditions: that the event was unforeseeable, unavoidable and impossible to overcome [2].

Timelines play an important role in this context. Existing bond contracts made before the COVID-19 outbreak can easily meet the three conditions. The question lies with contracts signed after 11 February 2020 when WHO declared COVID-19 a global pandemic. There was even an earlier notice on 30 January 2020 stating that the outbreak is a Public Health Emergency of International Concern. Any contracts made thereafter should not deem the pandemic as unforeseeable. This may increase the risk of performance bond claims if projects are delayed or not completed.

Risk management has become more crucial than ever with the extensive impacts of the pandemic; image by Abdul Razak Latif/Shutterstock

HOW CAN RISKS BE MINIMISED?

Also read a construction lawyer’s point if view, Chan Kheng Hoe: COVID-19 and Contractors’ Dilemma

Construction disputes are expensive and time consuming. The best practice is to draft a contract that covers a virus outbreak. Learning from the current situation, a little bit of work up front will minimise the pandemic impacts on projects and business in general. But what if the contract has been signed without a virus outbreak classified in the force majeure clauses?

The first step is to consult with a good construction attorney and draft a new contract that includes content specific to COVID-19 delays. Leaving the contract up to the court’s interpretation may put a contractor at a disadvantageous position. Here are some key steps to reduce likelihood of claims against bonds[3].

Planning for risk: Project managers should be encouraged to add COVID-19 into project risk registers and create risk mitigation strategies for shortages. Guidance from the health authorities should also be incorporated into site practices.

Being proactive and communicative: If there are concerns about risk to a project, a surety company should be involved. In areas impacted by COVID-19, contractors must contact relevant parties, including suppliers, to discuss contingency plans and strategies; communicate the contract clauses; list the liquidated damages or penalties for delays; and see if an agreement can be reached.

Reviewing backlog: Backlog adjustment should be made if resources, such as labour, are prioritised for a job that is impacted by COVID-19. If resources are becoming limited, some projects in the pipeline may be deferrable until the pandemic is under control.

Assessing the financing: Up front payments to suppliers may increase the risks, especially with the current development as governments are exercising stricter border controls and domestic mobility. If possible, capital expenditures should be delayed until there is more certainty. This can help conserve cash in the business.

[1] Construction Guidance for Coronavirus (COVID-19) Pandemic – ajg.com

[2] Performance Bonds and the Coronavirus | MG Surety Bonds.

[3] How to Avoid Coronavirus-Related Surety Claims in Construction – Hylant.

Disclaimer: Construction+ makes reasonable efforts to present accurate and reliable information on this website, but the information is not intended to provide specific advice about individual legal, business, or other matters, and it is not a substitute for readers’ independent research and evaluation of any issue. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional should be sought. Construction+ makes no representations of any kind and disclaims all expressed, implied, statutory or other warranties of any kind, including, without limitation, any warranties of accuracy and timeliness of the measures and regulations; and the completeness of the projects mentioned in the articles. All measures, regulations and projects are accurate as of the date of publication; for further information, please refer to the sources cited.

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In the face of global climate change and diminishing natural resources, designing cities and buildings today require environmental, economic and social considerations. While sustainability focuses on how we can slow down effects of global warming, there is also a pressing need to look into the aftermath of extreme weather events.

Greenhouse gas emissions exacerbate water-related disaster risks, intensifying tropical typhoons that may severely affect cities and the built environments. Flooding and wind damage are some of the climate-change-driven impacts that have threatened us in the past decades. For the construction sector, this means we need to build more resilient cities with efficient disaster risk management.

WHY DO WE NEED TO BUILD RESILIENT CITIES?
Economic losses due to climate-related and flood-specific disasters are high. Globally, these are increasing exponentially since the 1990s, amounting to at least US$150 billion per year.

Asian cities are particularly vulnerable to risks associated with natural disasters. While we’re also facing earthquakes, volcanic activities and other natural disasters, flooding and other water-related calamities pose more significant risks and undermine long-term economic growth, especially in coastal areas and cities with poor disaster risk management (DRM)—such as Jakarta, which suffers from flooding almost every year during the rainy season. Managing natural disaster risks is an essential component of urban policies in fast-growing Asian cities, particularly as the impacts of climate change worsen.

WHAT ARE THE CHALLENGES AND OPPORTUNITIES?
Research by OECD on the assessment of DRM policies in Southeast Asian cities—Bandung, Indonesia; Bangkok, Thailand; Cebu, Philippines; Hai Phong, Vietnam; and Iskandar, Malaysia—show the following main findings and recommendations.

Challenges
Southeast Asian cities are largely underprepared for natural disaster risks, especially with regard to vulnerability and risk assessment practices. Comprehensive hazard assessments and mapping have not been uniformly employed. Land-use policies do not often consider DRM, which has resulted in continued urban development in risk-prone areas.

Some recommendations would be to conduct a comprehensive vulnerability and risk assessment to develop a local resilience action plan; and to adopt risk-sensitive land-use policies combining regulatory and fiscal instruments to guide urban development away from risk-prone areas.

Opportunities
What should be noted is that by 2050, two-thirds of Asia’s infrastructure needs still have to be built and financed, thus providing an opportunity to factor in resilience to natural disasters. The substantial need for infrastructure investment will require large-scale private sector engagement. To this end, public finance plays a critical role to facilitate, leverage and guide private investment.

Effective design and implementation of land-use strategies and policies to guide private investment could minimise risks and avoid locking cities into vulnerable development patterns that will be costly to reverse in the long run.

July 2020: Infrastructure development in Kuala Lumpur, Malaysia; image by Ismail Sadiron/Shutterstock

HOW DO WE MINIMISE THE RISKS?
Reducing the impact of flooding and water-related disaster risks could be done through the use of technology such as the Geographic Information System (GIS) platform that brings together a multitude of data for an accurate assessment—such as the topographical survey, building models, local rainfall, waterbody distribution, drainage network and surfaces’ imperviousness.

The use of GIS technology and other digital tools could also be leveraged to co-locate vulnerable populations, assets and geographic areas. This critical information would provide Southeast Asian policy- and decision-makers with data to formulate and implement more effective, targeted and responsive DRM measures.

As flooding is likely to have serious economic consequences through the loss of employment, livelihoods and trading opportunities with local and international markets—for instance, the damage may include city infrastructure and major ports as well as affect international trade—engagement with the local business communities and the private sector is paramount. Resilience to natural disasters should be factored in.

Also read: Low impact development (LID): A stormwater management system

There should also be emphasis on the preservation of trees, natural topography and environmentally sensitive areas such as hill land, natural water courses, flora and fauna; and the creation of constructed wetland to further facilitate water quality control and green lungs to act as buffer zones against emissions.

Disclaimer: Construction+ makes reasonable efforts to present accurate and reliable information on this website, but the information is not intended to provide specific advice about individual legal, business, or other matters, and it is not a substitute for readers’ independent research and evaluation of any issue. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional should be sought. Construction+ makes no representations of any kind and disclaims all expressed, implied, statutory or other warranties of any kind, including, without limitation, any warranties of accuracy and timeliness of the measures and regulations; and the completeness of the projects mentioned in the articles. All measures, regulations and projects are accurate as of the date of publication; for further information, please refer to the sources cited.

Hyperlinks are not endorsements: Construction+ is in the business of promoting the interests of its readers as a whole and does not promote or endorse references to specific products, services or third-party content providers; nor are such links or references any indication that Construction+ has received specific authorisation to provide these links or references. Rather, the links on this website to other sites are provided solely to acknowledge them as content sources and as a convenient resource to readers of Construction+.