COVID-19: Project continuity planning · 2020. 7. 28. · COVID-19: Project continuity planning — May 14, 2020. Understanding impacts to date & risks going forward

COVID-19: Project continuity planning—May 14, 2020

Understanding impacts to date & risks going forward

2© 2020 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

With you todayJordan Thomson, P.Eng., MBASenior Manager, Infrastructure AdvisoryKPMG in Canada

[email protected]

Augusto Patmore, P. Eng., MBAPartner, Infrastructure AdvisoryKPMG in Canada

[email protected]

Lindsay Wright, MASenior Manager, Infrastructure AdvisoryKPMG in Canada

[email protected]

mailto:[email protected]:[email protected]:[email protected]


Agenda

Labour & staff

Supply chain

Financing

COVID-19 impacts – To date and going forward

Methods for relief

Impact areas to monitor

Adapting to new ways of working

Developing a continuity plan

Resetting post-impact


COVID impacts to date & future risks• The construction industry has weathered the storm of

COVID-19 well so far. While there have been significant impacts to companies and projects, the industry has adapted to the challenges it faces.

• However, while we are beginning to see lifting of restrictions, this is not a return to business as usual.

• The industry will continue to see impacts from the pandemic and our new ways of working for the foreseeable future.

• As such, it’s important for owners, contractors, and investors to take a holistic look at the impacts to date on their current projects, and assess the risks are going forward in order to develop a strong project continuity plan for the challenges ahead.

Projects sit at the intersection of four key value chains

Owner

Contractor

Des

ign

& En

gine

erin

g

Trades & Skilled Labour

Material Supply Chain

Fina

ncin

g


Impacts on the construction industry in OntarioA survey by the Ontario Construction Secretariat of 200 contractors across the province found:

19%

33%35%

12%2%

Impact on construction activities

Total Impact

Major Impact

Moderate Impact

Minimal Impact

No Impact

29%

34%

26%

8%3%

Impact on supply chain

High Medium Low No Impact Don't Know

2% 6%

12%

32%

48%

2%

Recovery time

>12 Months

6-12 Months

3-6 Months

1-3 Months


Trends observed in the US construction industry Another survey of construction projects across the United States by Dodge Data & Analytics found similar trends:

Primary causes of impacts

• Government mandated closures for public safety, forcing sites to shut down

• Issues with getting material and equipment on site

• Worker availability due to social distancing and personal issues

• Owner delays or cancellation of projects of upcoming projects

• Delays in permitting and inspection by government agencies

39%

27%

34%

Current project impacts

48%

39%

13%

Expected project impacts in 3 months

Severe Impact Moderate Impact

29%

22%

20%

14%

11%

Source: Dodge Data Analytics - Keeping Business Going in a Time of Crisis

Severe impact Moderate impact


Working through the pandemicNew ways of working for construction sites to manage COVID-19 risks will impact productivity

While the provincial health & safety laws still apply, the Governments of British Columbia and Ontario have issued the following guidance for sites:

• There should be no more than 50 people in the same space in any circumstances.

• Where possible, employees should maintain a distance of two meters apart from each other.

• Post signage that limits the number of occupants in any elevator to four people at a time.

• Reduction of in-person meetings and other gatherings – holding site meetings in open spaces or outside.

• Increased number of handwashing stations and posted signage that identifies their location.

• Maintain a list of employees that are currently working on sites, updating this list daily.

• All common areas and surfaces should be cleaned at the end of each day. Examples include: washrooms, shared offices, common tables, desks, light switches and door handles.

Source: https://news.gov.bc.ca/releases/2020EMBC0002-000542

With the exception of Quebec, construction projects were generally deemed essential services throughout Canada. However, the additional health and safety measures required have impacted the level of productivity sites can obtain.


Labour & staff challengesChallenges between different sites and teams

Remote sites• Outbreaks at camp project sites,

such as Imperial Oil’s Kearl Lake site have raised concerns

• Other remote projects have been put on hold and crews have been sent home

• Development and operations of mine sites have been ramped down

“32 COVID-19 cases connected to Kearl Lake outbreak, located 70 kilometers north of Fort McMurray.”

Source:Fort McMurray Today

Local sites• Labour availability has declined for

many projects by 10%-20% based on our conversations with some of the larger contractors.

• Subcontractors are limiting crew sizes to adhere to social distancing guidelines

• With children off school and other personal obligations, some workers are choosing to stay home

Owners teams• Many public sector owner’s teams

are not equipped for remote working, impacting decision making times

• Engineering and design teams are generally better equipped for remote working, but may not be as productive


Supply chain disruption

• Restrictions on staffing across the manufacturing sector have slowed access to both stockpiled materials, as well as the fabrication of new goods.

• This is particularly the case in ‘finished’ goods that involve more direct involvement of workers in manufacturing (e.g. lighting fixtures, hardware).

• While Canadian borders have remained open to trade, the globally integrated supply chain may result in delays as other countries shut down.

• This is particularly the case with major long-lead equipment that is often fabricated in in other countries with their own COVID-related restrictions.

• Logistics industries have also been impacted through labour shortages, causing delays between stages of the supply chain.

While the material supply chain has generally remained intact and open through the pandemic, there have been difficulties and delays in procuring and physically receiving construction materials.

• Projects should be engaging with their supply chain, focusing on international suppliers, to assess risk and possible delays.

• Where possible, try to advance shipping dates to get materials and equipment on site, as delays in the supply chain are likely to persist.


General construction pricesConstruction prices have continued to rise through Q1 2020

• As the impacts of COVID-19 were only beginning to be felt in the last few weeks of Q1 2020, the impact on construction prices in the quarter was minimal.

• Accordingly, analysis by StatsCan shows quarterly residential and non-residential construction prices rising by 0.6% and 0.5% respectively, which is aligned with quarterly general CPI growth of approximately 0.5%.

Source: Statistics Canada - Building construction price indexes, first quarter 2020

0 0.2 0.4 0.6 0.8 1 1.2 1.4

St. John's

Halifax

Moncton

Montréal

Ottawa

Toronto

Winnipeg

Saskatoon

Calgary

Edmonton

Vancouver

Composite

% Increase

Constrution Index Percent Change Q4 '19 to Q1 '20

Residential buildings Non-residential buildings


“While the global economic outlook is highly unpredictable, we expect to see further growth in steel demand in 2020 of 1.7%, with some emerging and developing economies contributing more. This forecast faces significant downside risks if the current level of uncertainty prevails.”

Al Remeithi - Chairman of the World Steel Economics Committee

Steel prices

Sources: IHS Markit - Steel Price Forecast and Market OutlookGeneral Steel Corporation Steel Building Price Factors and Predictions 2020

• Impacts from COVID-19 will reduce both supply and demand for steel.

• Prices have generally fallen by $70-80/T from the high in January 2020 through to May 2020.

• Steel prices are expected to recover as projects around the world ramp back up later this year, and potentially as infrastructure stimulus spending increases.


Concrete & cement prices Given the regional nature of concrete and cement manufacturing, prices are not yet showing an impact

• Concrete and cement manufacturing facilities have remained open across most of Canada, as essential services that form part of the construction value chain.

• While ready-mix prices have generally been rising in line with inflation over the last 10 years, there has been a decline for the last 2 years.

• At the moment, ready-mix vendors have not changed their annual price lists, which show most prices in-line with each other.

• Most on-going projects will have established concrete pricing with vendors, and as such would be insulated from price changes.

2020 GTA ready-mix prices

Company CSA 30MPa mix ($/m3)

Dufferin $212

CBM $210

Source: Daily Commercial News - 2010-2019 Trends in Canadian Building Product Material Costs


Diesel pricesDiesel prices have plummeted since January 2020

• Diesel prices have fallen approximately 30% from their high in January 2020.

• This is primarily due to over-production by Saudi Arabia driving down oil prices. However, the low prices have been exacerbated by steep declines in vehicle and airline travel due to COVID-19.

• The latest forecasts show a slow recovery of prices into 2021, increasing by roughly 10% by May 2021.


“TransLink says it's losing $75M a month and faces 'really unpleasant options' without emergency fundingTransLink is seeking emergency relief funding of around $250 million from the federal and provincial governments to offset losses incurred for providing essential transit services during the COVID-19 pandemic.”

Source: Global News

Is the major projects pipeline at risk?COVID-19 has had a particularly deep impact on transit agencies, who are driving forward some of the largest projects in the country

“TTC says it’s losing about $18 million a week in fares, will need bailout over COVID-19 ridership crashThe agency had expected to collect about $1.3 billion in fare revenue this year, which would account for roughly two-thirds of its $2-billion operating budget”

Source: Toronto Star

“GO Transit ridership down 90% as people stay home during COVID-19 pandemic.Revenue has also plunged for the agency, down to $1.1 million a week from $11 million weekly prior to the pandemic.”

Source: CBC News


Financing impacts COVID-19 has increased the risk profile for major construction projects, whichmay force owners and financiers to reconsider providing funding

• Project financing is still available, but the cost of borrowing has increased• We’ve seen risk premiums on project financing have increasing by 0.8%-1.0% (effectively doubling)

• We’ve heard of major projects delaying financial close for the next few months to see if ratescome back down.

• It’s unclear how long this may last. From our experience during the financial crisis in 2008, it tookabout a year for risk premiums to go back to normal

• Recent federal government statements imply that it will only step in to help support municipal andprovincial transit, some of which are losing $75-90M a month at the moment, as a last resort.• As such, funding for transit projects, which are typically done at provincial and municipal level, will

need to be carefully thought through.

The ongoing underlying issue that has been exacerbated by COVID-19 is that funding for large infrastructure projects can be challenging. Usage fees (tickets, tolls) are often insufficient so the government needs to step in with tax dollars.

…No one wants to pay for infrastructure

Source: Global News - Coronavirus: TTC announces layoffs as its forced to adapt amid COVID-19 pandemicCTV News - Transit system may become 'unrecognizable' without financial support: TransLink


Financing considerations going forwardThe interruption of a project can have significant implications on financing. Asmany major project companies are special purpose vehicles with limited capital,there are a number of safe-guards in place to limit lender risk that projectsshould be aware of:

Rights of approval on budget changes: Projects may need to take measures to mitigate theimpacts of COVID-19 that will have an effect on budget. However, lenders often have rights ofapproval for changes to budget and spending. If the lender’s rights impede necessary actions,projects may need to seek waivers from lenders to release them from their obligations.

Draw-stop: If the project is delayed due to COVID issues and has not fully drawn its loan,lenders may have the right to withhold financing. Draw-stop events typically include an event ofdefault (or potential event of default), funding shortfalls, and delays in construction.

Financial covenants: Project finance agreements include financial covenants to ensure theproject company is able to service its debt. If a project company has liquidity issues due toCOVID-19 and breaches its covenants, it may face increased interest rates, or be required toinject cash to prepay debt or substitute revenue.

Source: Norton Rose Fulbright - COVID-19 and its impact on project finance transactions

Financial restrictions should be carefully considered as part of your project’s response to COVID-19


What remedies are available for relief?Broadly speaking, construction contracts provide two paths for relief in the case of events like COVID-19:

Force MajeureThis event type covers major events that were not reasonably foreseeable at the time ofthe contract, and would impede one of the parties from being able to perform itsobligations under the contract. Under most forms of contract in Canada, Force Majeureprovides either party with an extension of time and relief from any liquidateddamages, but not compensation for costs incurred.

Change in lawWhile there have been impacts to labour due to illness, the primary impact of thepandemic has been the implementation of restrictions on the economy (closing ofworkplaces, limiting travel etc.) to slow the spread of the disease. The application ofrestrictions like this can typically be presented as a change in law. Unlike force majeure,change in law provisions typically provide both an extension of time for the contractorand relief for costs attributable to the impacts of the change in law.

Source: White & Case - COVID-19: The Current Impact on Construction and Engineering Projects


Cost & schedule impact drivers

• Reduced productivity of labour (historic daily output per person versus during the COVID-19 outbreak)

• Standby and unproductive time due to material shortages

• Additional PPE and training requirements

• Inefficiencies from resequencing of work

• Staff and labour absenteeism

• Delayed decision-making due to remote working

• Knock-on delays from weather-sensitive work getting pushed into different seasons

• Demobilization, security, and remobilization costs for projects put on hold

• Additional financing and bonding costs from project prolongation and any increased debt load to meet payment requirements

Delay & disruptions claims: Quantifying impactsTo ensure the impacts of COVID-19 are fairly and appropriately distributed under the contract, it is crucial to be able toshow a clear line of causation between the impacts and the pandemic and/or the actions by the federal andprovincial governments


Adapting to the new normalWhat should projects be thinking about to ensure the health and safety of their teams and projects as we move forward?

Conduct COVID-19 government guidance checksConfirm latest guidance from various level of government and other applicable regulatory entities in order to incorporate into updated Health & Safety policies and procedures.

Conduct COVID-19 training for safety leads and specialistsIdentify COVID-19 safety training for project safety leads/specialists and other site safety leaders in order to ensure they have the latest training on how to prevent and mitigate the risks of COVID-19.

Conduct a project risk workshop and COVID-19 risk response plan Perform a risk workshop with the project team and key stakeholders focusing on key COVID-19 risk areas, such as resources, supply chain, logistical constraints, contractual risks, and EH&S and regulatory constraints.

Assess the construction supply chain and Contractor financial capabilities Assess the level of impact on project’s supply chain from the prime contractor to lower-tier subs and material/equipment vendors. Determine financial viability of existing and prospective contractors through interviews and prequalification measures.


Resetting the project for successRe-baseline the project to provide clarity on impacts going forward

Review the project baseline and progress• Review original baseline schedule to determine and document pre-COVID-19 impacts

and delays.• Update and document the pre-COVID-19 baseline budget and reconcile actual costs

incurred to date.

Perform a project Quantitative Risk Analysis (QRA) to re-establish the baselineschedule and budget• Perform a quantitative cost and schedule risk analysis to assess ranges of cost and

schedule uncertainty. This should be done in consultation with the project owner to alignwith their risk profile and ensure agreement on project milestones.

Develop a pandemic project slowdown or shutdown plan• Building on lessons learned from the slowdown/shutdown and the QRA findings,

develop a plan to address future work disruptions should there be a second wave ofCOVID-19 related impacts and shut-downs.


How can we help?A quantitative risk assessment (“QRA”) of the cost, schedule and risk of the project can providethe necessary information to make informed project decisions in these uncertain times.

― Resource availability

― Subcontractor supply chain

― Material supply chain

― Equipment impacts

― Productivity assumptions

― Site shutdown requirements

― Contract risks

― Government & regulatory constraints

― Labor/EHS risks

― GC/ Subcontractor financial health

― Baseline project schedule & constraints

Key process steps & milestones:

Phase 1:Develop understanding Phase 2:Analysis Phase 3:

QRA Modeling and Reporting

1. Develop work plan

2. Inventory key stakeholders and documents needed

3. Distribute document request lists and schedule interviews

1. Review estimate to complete

2. Supply chain assessment and risk range development

3. Review of schedule impacts, productivity ramping, and avenues for recovery (force majeure, change in law etc.)

1. QRA modeling results

2. Reconstruct and reforecast estimate to complete

3. Summary of anticipated challenges and risk assumptions

Assessment areas


Useful resources

Government Resources • The Canadian Construction Association’s - Pandemic Preparedness Guide• Government of Ontario - Construction Site Health and Safety during COVID-19• Infrastructure Health & Safety Association - COVID-19 Updates• The Centers for Disease Control and Prevention - Interim Guidance for

Businesses and Employers online resource

Link

LinkLink

Link

KPMG Insights • Infrastructure and COVID-19 – Richard Threlfall,

KPMG Global Head of Infrastructure• Force Majeure: COVID-19 – Impacts of Pandemic on the Canadian Construction

Industry -Jordan Thomson, Senior Manager Global Infrastructure Advisory

Link

Link

https://www.cca-acc.com/covid-19-resourceshttps://www.ihsa.ca/Urgent-Notices/COVID-19-Main.aspxhttps://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.htmlhttps://www.ontario.ca/page/construction-site-health-and-safety-during-covid-19https://home.kpmg/xx/en/blogs/home/posts/2020/03/infrastructure-and-covid-19.htmlhttps://www.linkedin.com/posts/jordan-thomson-b8ba181b_force-majeure-covid-19-activity-6651147124102750208-AdG0

Thank you

home.kpmg/ca/COVID19

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavourto provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2020 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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COVID-19: Project continuity planningWith you todayAgendaCOVID impacts to date & future risksImpacts on the construction industry in OntarioTrends observed in the US construction industry Working through the pandemicLabour & staff challengesSupply chain disruption General construction pricesSteel pricesConcrete & cement prices Diesel pricesIs the major projects pipeline at risk?Financing impacts Financing considerations going forwardWhat remedies are available for relief?Delay & disruptions claims: Quantifying impactsAdapting to the new normalResetting the project for successHow can we help?Useful resourcesThank youSlide Number 24

Documents

COVID-19: Project continuity planning · 2020. 7. 28. · COVID-19: Project continuity planning — May 14, 2020. Understanding impacts to date & risks going forward