construction contract

The potential impacts of the Coronavirus and COVID-19 on the construction industry are unprecedented and unpredictable. Impacts may include project suspensions, delays, government or medical ordered quarantines, governmental actions such as stay at home orders, supply/material shortages, equipment shortages, labor shortages, absenteeism, lost productivity, and increased costs resulting from implementing Center for Disease Control and Prevention (CDC) and other agency health and safety practices. The following are some best practices to consider during these challenging times:

Implement Best Practices for Jobsites and Home Offices 

Implementing proper safety protocols to address disease spreading is critical at this stage.  To the extent practical and possible, consider the implementation of Associated General Contractors of America ‘s (AGC)  best practices for jobsites and home offices or CDPHE’s Guidance for Construction Sites.  As set forth below, track all such costs and seek appropriate equitable price and schedule adjustments.  Seek additional guidance from appropriate professionals, and monitor and follow the standards and recommendations offered by organizations such as the Occupational Safety and Health Administration (OSHA), (CDC), the World Health Organization (WHO), and your local state level Office of Emergency Management.

Review Stay at Home Orders

Carefully review and understand all applicable state and local stay at home orders. Thus far, construction is deemed an essential business according to the Department of Homeland Security (DHS) and is therefore exempt.   Have each employee carry a “safe passage” letter. This letter indicates that your company is an exempt business and that the employee is an essential worker.

Request an Essential Contract Letter

Request your upstream contracting party (owner, general contractor, subcontractor, as the case may be) to provide you a letter that states that your contract is deemed a critical or essential business activity under the relevant state stay at home order and/or under the DHS guidance.  This may assist you in obtaining equitable schedule and price adjustments if you incur additional costs to continue performance. 

Review Contracts and Plan Ahead

As a best practice, review all contracts for provisions relating to force majeure, change orders, suspension, and differing or unforeseen conditions. Force majeure provisions may provide relief.  “Force Majeure” provisions can excuse a party’s inability to meet contractual obligations due to circumstances that are outside the reasonable control of the non-performing party.  Common circumstances include:

  • an act of God, landslide, tornado, earthquake or similar occurrence, fire, explosion or other casualty or flood
  • an act of the public enemy, terrorist act, war, blockade, insurrection, riot, general arrest or restraint of government and people, civil disturbance or similar occurrence or sabotage
  • labor strikes, lockouts, work stoppages, boycotts, and walkouts.

The burden of demonstrating a contractual force majeure event typically rests with the party seeking to avoid its contractual obligations.  Importantly, the scope and application of force majeure provisions varies by state, so each provision must be carefully evaluated.  Some states will narrowly interpret force majeure provisions and only permit the application if it is specifically listed. Other states enforce broader interpretations and enforce general catch-all categories.

An important factor to consider when invoking a force majeure clause is that the party wishing to invoke must prove that the force majeure event caused the party to be unable to fulfil its obligations under the contract. A force majeure clause generally requires the party invoking the clause to use reasonable endeavors to avoid the effects of force majeure to the extent possible. and that there are no reasonable alternative means for performing under the contract.  Many provisions only grant equitable schedule adjustments and do not provide relief for cost adjustments.

Each force majeure clause is different and must be carefully reviewed by counsel.  However, a force majeure clause may provide relief for COVID-19 if the clause includes events such as:

  • diseases, pandemics, epidemics, or other national health emergency
  • the unavailability of labor and/or materials as a result of any health emergency
  • any governmental restrictions in respect of labor or materials in connection with any health emergency
  • any declaration of a state of emergency
  • compliance with a law or governmental order, rule, regulation or direction;
  • any action taken by government or public authority, including imposing embargo, export restriction, or other restriction or prohibition;
  • delays by suppliers or materials shortages;
  • difficulty or increased costs in obtaining workers, goods, or transport; or
  • other circumstances affecting the supply of good or services.

The timing of implementation of the original contract is important with respect to the application of a force majeure event.  Most force majeure clauses will require that the event was unforeseeable at the time the contract was executed. If the contract was entered into after the outbreak of COVID-19, it may be foreseeable that the virus would have an impact on the contract performance. To this end, both parties may not be entitled to relief.

Every situation is different. There are several best practices you should consider in determining the impact of COVID-19 on your projects and contracts:

  • Review the applicable force majeure provisions to determine what situation is covered.
  • Confirm the notice requirements under the contract. This is critical, as most force majeure provisions have time limitations on reporting the force majeure event after it occurs and contain waiver provisions if notice is not timely provided.
  • When providing notice of a claim, provide as much information about the impact of COVID-19 on the project. Include all schedule and cost impacts, and when the force majeure event is expected to conclude. If complete information is not available, your notice should state that once additional information becomes available, the notice will be updated.
  • Be careful that any notice does not trigger a default, anticipatory breach or right to suspend or terminate by the other party. Carefully review the remedy provisions for force majeure events.
  • Document all schedule and cost impacts, including creating separate job-cost codes for COVID-19 impacts.
  • Request that all downstream suppliers and vendors provide assurances that they will not be impacted by COVID-19. Consider whether and when an alternate subcontractor, vendor or supplier should be retained.
  • Develop contingency plans for labor and material shortages.
  • If you have received a force majeure notice from one of your subcontractors, vendors or suppliers, consider whether that notice triggers a force majeure event for upstream report purposes.

If your contract does not include a force majeure provision, one will not typically be inferred. Contact legal counsel to determine your rights, as other common law defenses may apply to the COVID-19 situation. Other common law defenses may include:

  • impossibility
  • impracticability
  • frustration of purpose. 

These are highly fact dependent and will depend on the law of the jurisdiction at issues.

Document Cost and Schedule Impacts

As stated above, document and segregate into separate job cost codes any and all impacts relating to the Coronavirus. Train your project team to document lost productivity in daily records. They should also provide updates to the owner/general contractor of all potential cost and schedule adjustments. These updates should all in accordance with the changes provision of the contract.   Meeting minutes and look-ahead schedules should identify all related impacts.

Review Changes Provisions

Carefully review each contract and understand the changes provisions.  Give timely and proper notice of all schedule and cost impacts.  Some contracts may require CPM support or a Time Impact Analysis to back up a claim for additional time. If the delay cannot be quantified at the time notice is provided, your notice should state that once additional information becomes available, the notice will be updated.

Review all Insurance Policies

Review all policies and consider whether the policies potentially provide coverage for Coronavirus-related losses. This includes Builder’s Risk, OCIP/CCIP, CGL and umbrella, business interruption, and any other policies.  These types of insurance products afford coverage for losses associated with delays or disruptions in trade or supply chains arising out of specified events. The events might include:

  • emergencies resulting in closure of ports and transportation centers,
  • quarantines
  • other related risks

Have counsel review each policy for possible coverage.  Insurance policies typically include notice obligations and there may be adverse consequences if notice is not provided timely.  Provide timely notice of any potential claims. It is better to be conservative and provide notice of any potential claim.  Document any direct physical loss of or damage to property, whether to the home office or to affected project sites.

Request Downstream Assurance 

Carefully review all subcontracts and purchase orders and consider requesting assurances that the downstream party will be able to perform. 

Contract Negotiation 

Make sure all contracts that are currently being negotiated and executed address potential impacts relating to Coronavirus and COVID-19. Force majeure provisions will not apply because the condition is not unforeseen at the time the contract was signed. This is a key element for enforceability of a force majeure clause.  The language should be drafted by your legal counsel. It should cover all direct and indirect schedule and cost impacts that might result from COVID-19.  The following is suggested language (modify as necessary):

Should Subcontractor  be obstructed or delayed in the commencement, prosecution or completion of the Work, without fault on its part, by reason of: failures to act, direction, order, delay or default of Owner, Owner’s Representative, Architect, Owner’s consultants, Contractor or any other Contractors employed directly by Owner; changes in the Work; fire, lightning, earthquake, enemy action, unusually adverse weather that demonstrably impacts the Project’s critical path, act of God or similar catastrophe; disease; pandemic (including the Coronavirus – COVID 19); epidemic, health emergencies, quarantine, travel restrictions, unavailability (with the exercise of due diligence) of labor and/or materials; unavailability of labor and/or materials as a result of any public health emergency, epidemic or pandemic;  any governmental restrictions in respect of labor or materials in connection with any public health emergency, epidemic or pandemic; governmental restrictions in respect of labor or materials; any declaration of a state of emergency by the State of XXXX, the United States federal government or any other national government; with concealed conditions; hazardous materials; governmental delays not due to fault of Subcontractor  or anyone else for whom Subcontractor  is responsible; and industry-wide strikes or any other matter beyond the Subcontractor’s reasonable control that demonstrably impacts the Project’s critical path (all of the foregoing collectively “Unavoidable Delay”), then the Subcontractor shall be entitled to a day for day extension of time to perform the Work by reason of any or all of the aforesaid causes. In addition, Subcontractor shall be entitled to an equitable price adjustment to the Contract Price the extent that any of the foregoing Unavoidable Delays give rise to additional Project related Costs of the Work, including substantiated and reasonably incurred extended General Conditions Costs. Subcontractor promptly shall advise Contractor in writing upon discovery or knowledge of an Unavoidable Delay (or the reasonable likelihood thereof).

Project Planning

Project teams must ensure that the scope of work, project schedule and project budget account for potential COVID-19-generated impacts. These impacts include:

  • a reduced work-force
  • reduced availability or increased cost of necessary materials
  • potential delays and travel restrictions
  • quarantines and other governmental action

Deadlines should include additional float to account for potential Coronavirus-generated delays that might impact the end-dates for any contractual deliverables. Float should also be built into activity-specific benchmarks, particularly where delays could occur on the critical path of a project. Project budgets should account for potential cost increases relating to such Coronavirus impacts. These impacts include:

  • increased material costs
  • unexpected overtime
  • increased inefficiencies

Stay Informed

The AGC has assembled useful guidance on the Coronavirus.

Author: Giovanni M. Ruscitti