The Coronavirus pandemic has been covered extensively since the start of 2020. The potential impact of the Coronavirus on the construction industry is wide-reaching. This involves onsite and offsite impacts including labor shortages, production delays, transportation embargos or even governmental actions.
So how can you be prepared to combat these risks and prepare for the road ahead?
- Review contract terms: Review each contract carefully for clauses that address rights in the event of unforeseen conditions or excusable conditions or delays. Terms may vary, however there is typically a clause in most contracts that outline unforeseen circumstances. For example, your contract may or may not use the phrase “force majeure” which is a French term commonly used in US contracts that refer to overwhelming forces that would otherwise prevent the fulfillment of a contract. If there appears to be no clause, keep looking as some contracts contain relief in circumstance, which can allow for extra time and compensation for unforeseen events.
- Provide clear and compliant notice: Identify your contract’s notice provisions for claiming delays and additional costs, including time limits for giving proper notice, who must be copied on the notice, as well as the method of delivery. Each project should have a written notice sent to the project’s owner that complies with contract requirements, explains the cause, and reserves rights for time and money. Some contracts may include provisions that may expose the contractor to forfeiting rights to adjustments if notice is not made in a timely manner. Notices can be sent in a few ways, depending on your contract, such as email and hand delivery (certified mail). Verbal communication should be avoided as a written record trail should be established. The objective of these notices is to provide the project owner with advanced warning of the likely impacts of delays. Taking these steps may enable the owner and yourself to make appropriate, informed business decisions. It is good practice to develop a notice form that meets the requirements of each individual contract.
- Suspension and termination clauses: Most contracts include a clause that allows the owner to suspend the project. These clauses allow for time extensions and even additional compensation if a project is restarted. These clauses also tend to give the contractor the right to terminate an agreement and receive defined compensation if the suspension lasts longer than a stated time frame.
- Document cost and schedule impacts: Properly document and segregate any impact from the Coronavirus on construction projects that were impacted. Jobs should be evaluated for two components 1) establishing the right to added time and a price adjustment and 2) establishing the amount or extent of the delay/added costs. Be as specific as possible with your reports to accurately capture the impact of the Coronavirus delay.
- Contracts that do not address the issue: What if your contract does not support relief efforts for extraordinary events like a pandemic or matters beyond your control? Under common law, circumstances that sufficiently delay or interrupt performance may excuse a contractor’s non-performance. However, the concept of foreseeability can affect the support of common law. The argument that performance is excused may be undermined on the grounds that the party should have foreseen the problematic circumstances. We recommend seeking counsel as assessing these issues tends to involve fact-intensive inquiry.
- Consider insurance products: Evaluate existing insurance policies to see if coverage is offered for Coronavirus-related losses. Inspect existing insurance policies of the project owner including Builder’s Risk, business interruptions and any other relevant documents. Many policies require demonstration of actual losses, therefore having the proper documentation for support is key.
- Prime and subcontracts: Analysis of prime and subcontracts should be conducted considering all of the differing relevant matters in each. Some subcontracts may have identical terms and conditions that exist in the prime contract while others may have different terms and conditions. Carefully phrase communications to ensure when an issue is addressed in the prime/owner context that it is consistent with how the issue should be addressed in the prime/subcontractor context.
- Identify challenges early: Contractors may have the responsibility to mitigate consequences that arise from a delay or disruption. Reach out to subcontractors and vendors to address any potential delays due to the Coronavirus. Discuss and develop a contingency plan with subcontractors and vendors. Consider exploring alternative sourcing options and substitution options if shortages are likely and notify the project owner on a timely basis of the change. Keep up to date with market conditions and the potential impact it may have on jobs.
- Consider unique safety issues: Revisit safety protocols of office and job sites and implement healthy procedures to properly address the spread of the disease. Providing guidance to employees regarding hygiene, travel, etc. may become a factor in continued performance or the shutting down of a project. It is suggested that contractors/employers seek guidance from professionals and follow the standards and recommendations offered by organizations like the Occupational Safety and Health Administration (OSHA), Centers for Disease Control (CDC), and the World Health Organization (WHO).
- Carefully consider language in contracts about to be executed: Contracts that were signed during the pandemic may present unique challenges as these conditions were not “unforeseen” at the time of signing. Carefully review contracts entered into this time to ensure that the appropriate language is included to still account for any delays that may take place.
Contractors should be reviewing and monitoring all of the above items to help mitigate any losses that may arise due to the pandemic. The best way to mitigate losses is to be proactive with existing and new contracts that are in process during this time. Keeping in constant contact with your legal counsel and CPA’s during this time is crucial.