Safety

As the Pandemic Ride Continues, What Challenges Can Construction Companies Expect?

Challenges construction companies can expect include safety concerns, labor shortages, surging material costs and bankruptcy filings—and recommendations to mitigate losses.
By Matt DeVries
September 21, 2021
Topics
Safety

To say that the construction industry has been in state of flux over the past 18 months is an understatement—it has been a roller coaster ride. In March 2020, words such as “pandemic” and “COVID-19” were introduced as contractors, subcontractors and suppliers began to experience unknown impacts on projects. At the same time that a majority of public activities were shutting down, construction work continued to bustle under a label of “essential services” depending upon the locality, the status of the project or the type of construction.

Aside from the new projects that were temporarily shelved or altogether scrapped, existing projects had to deal with evolving safety concerns, employment questions, material and equipment unavailability, and unknown impacts from government work stoppages and delays. The ride does not appear to be over as the industry grapples with what is called the “delta variant” of COVID-19. This new strain is more transmissible and more contagious than its predecessor, which is already causing renewed tensions on projects.

Top Challenges Construction Companies Can Expect

Continued and Heightened Safety Concerns

Increased and resurging COVID-19 outbreaks over the past month are likely due to the highly contagious delta variant. Contractors who successfully implemented safety protocols in compliance with the Centers for Disease Control and Prevention during the first part of the pandemic roller coaster ride should continue efforts for safety and prevention. On July 29, 2021, the CDC updated its guidance on return to work for critical infrastructure workers. Asymptomatic critical infrastructure employees can continue to work but, regardless of vaccination status, employees should be tested three to five days following the known exposure and should wear a mask in public indoor settings for 14 days or until they receive a negative test result. Unvaccinated employees should continue to mask and practice other precautions (e.g., social distancing) outdoors as well for 14 days or until a negative test result is received.

Tip: Contractors should continue to implement a three-pronged approach of:

  • masks;
  • social distancing on jobsites; and
  • increased testing, particularly for workers who haven’t been vaccinated.

Given the quick turnaround for test results, as well as the widespread availability of testing access, construction companies should be able to effectively decrease the impact of illnesses on the jobsite and home offices.

Unprecedented Skilled Labor Shortages

According to a recent U.S. Chamber of Commerce report, finding skilled labor continues to be a challenge for contractors. This quarter, 88% of contractors report moderate-to-high levels of difficulty finding skilled workers. The skilled labor shortage directly impacts project completion dates, increases bids and estimates and sometimes leads to contractors turning down work.

Tip: In addition to offering competitive incentives to attract skilled labors, contractors should think bigger. Construction companies should partner with local colleges and trade schools to create longer-term internship programs that can provide on-the-job training and real experience. It is no longer about offering the best wage. It’s about showing the labor pool the company cares about its employees. Focusing on developing a culture to allow employees to grow and further their careers can help build skilled labor crews.

Increased Material Costs and Unavailability

The prices of lumber, steel and pipe continue to escalate. The same U.S. Chamber of Commerce report found that about 33% of contractors are experiencing shortages in wood/lumber, up from 22% in Q1 of 2021. Similarly, 29% of contractors reported a shortage of steel (up 15 points from 14% in Q1 2021) and 12% reporting a pipe/PVC shortage. Increased material costs affect not only the raw material availability, but it also has a ripple effect on equipment and specially fabricated supplies.

Tip: Successful contractors have proven to be more proactive in dealing with the upswing in material costs. Put in its simplest terms, contractors can mitigate the risk by either:

  • buying all the material at the time of contracting based upon the locked-in prices; or
  • addressing the risk through a material escalation clause in the parties’ contract.

When drafting a material escalation clause, parties should consider including a percentage of cost increase that allows for recovery of costs. Additional best practices to deal with material unavailability or delays related to problems direct and indirect supply chains include:

  • Give full disclosure.As early as possible, notify the owner and architect/engineer that supplies or equipment delivery has been impacted, including any logistic log jams or deliveries.
  • Contact current suppliersand provide written notice of a potential claim for the impacts related to the failure to meet delivery requirements.
  • Confirm that there are no other local manufacturers of the same supply, material, equipment or component. If there is one, document the cost and time impact.
  • If there is an entirely different (but available) material or equipment, then check the technical specifications for substitution or waiver of the requirements.
  • Prepare a “claim” file with documentation of the measures the company had taken to mitigate losses, track schedule impacts and scope of cost increases are identified.

Rise in Bankruptcies

Despite the construction industry’s opportunity to operate through the pandemic as an “essential service,” there has nonetheless been an increase in construction-related bankruptcies in 2021. When a significant trade subcontractor or specialty supplier seeks bankruptcy protection, the “automatic stay” imposed by the filing of a bankruptcy petition becomes one of the most relevant issues to a contractor involved in a construction project. Absent court approval, the automatic stay prevents the general contractor from interfering with property of the debtor’s bankruptcy estate, including termination of the subcontract agreement. In turn, the project schedule can become intertwined with the bankruptcy proceedings. 

Tip: While there are limitations to what parties can include in their construction contracts relating to bankruptcy, one way a contractor can address the issue is by having the subcontractor agree that it will not oppose a request by the contractor (or owner) for relief from the automatic stay. While not a guarantee, the contractual waiver will certainly assist the contractor in seeking relief from the stay from the bankruptcy court. Additionally, another proactive approach to mitigating bankruptcy risk is to require payment and performance bonds from lower-tier contractors. While there may be an increased cost for the contractor or owner, it is one of the best ways to deal with a subcontractor or supplier who files for bankruptcy.

One Final Thought

To minimize the impact of COVID-19 and the delta variant on the overall contract price or time of completion, successful construction companies have instituted some best practices related to document management and preservation. Ultimately, documentation is necessary to establish adherence to an approved safety policy in the event there is a COVID-19 outbreak on a project site. As to delay and increased cost claims, proper documentation will help prove the occurrence of a condition for which compensation is due (i.e., a force majeure event like a global pandemic) and, more critically, the damage resulting from such a condition.

by Matt DeVries

Matt DeVries is head of the Tennessee construction law practice at Burr & Forman LLP. He focuses his practice primarily on construction and complex litigation, and is the founder of www.bestpracticesconstructionlaw.com

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