Legal and Regulatory

Pandemic Protection: Allocating Risk in Construction Contracts Through the Uncertainty of COVID-19

The best time to protect against the adverse impacts of a force majeure event, such as a pandemic, are during the financing and contracting portions of upcoming projects.
By Steven Gonzalez
August 3, 2020
Legal and Regulatory

The COVID-19 pandemic and its resulting shelter-in-place order, workforce impacts and supply chain delays have resulted in very interesting times for the construction industry. The question now is how everyone in the industry can protect themselves from further fallout and the next possible wave of shutdowns and disruptions.

The best times to protect against the adverse impacts of a force majeure event, such as a pandemic, are during the financing and contracting portions of upcoming projects. With these growing concerns, force majeure provisions in contracts have been expanded greatly to include not only the pandemic itself but also the resulting impacts including, but not limited to, labor strikes, project shutdowns due to employees testing positive, Center for Disease Control and OSHA requirements, blockades, or other government imposed restrictions on materials and equipment from foreign countries.

A recent example of a more expansive force majeure provision is as follows:

If Contractor suffers a critical path delay in the commencement or progress of the Work by any cause beyond Contractor’s control, Contractor shall be entitled to an equitable extension of the Contract Time and an equitable adjustment of the Contract Price. Examples of causes beyond the Contractor’s control include, but are not limited to, the following: (a) fire; (b) terrorism; (c) epidemics; (d) pandemics; (e) communicable diseases or viruses (f) quarantines, (g) adverse governmental actions beyond either parties control; (h) adverse weather conditions not reasonably anticipated; (collectively referred to herein as “Force Majeure Events”), which shall include any resulting governmental shut downs, quarantines, blockades, suspensions of travel and/or shipping from certain countries or areas and labor unrest. Contractor shall be entitled to an adjustment of the Contract Price and times for completion of the Work if its cost or time to perform the Work has been adversely impacted by a Force Majeure Event, or for suspension or stoppage of work by Developer due to such Force Majeure Event. The adjustment of the Contract Price shall also include reimbursement for all price or cost increases incurred as a result of the delays or impacts for Contractor’s materials and labor associated with the Work.

It is also important to coordinate the force majeure, change order, scheduling and liquidated damages provisions so that the contract when read as a whole is consistent in terms of the contractor or subcontractor’s ability to not only receive an equitable extension of time but also an equitable adjustment of the contract price and potentially extended general conditions or other items that will likely result from a pandemic-based delay event. Key to this coordination are the notice provisions and making sure that they allow for the parties to provide initial notices with follow up notices once the full impact has been realized and can be quantified. An open exchange of information during a force majeure delay will be essential to a resolution of the resulting claims.

Once these protections have been put in place during contract negotiations, perfecting the claim, if a global health crisis strikes, will need to be a multi-step process. Due to the nature of a pandemic and the resulting impacts, it will likely be difficult to fully quantify its effect on the project for some time. Immediate notice to the owner or contractor (in the case of a subcontractor) identifying a delay event (positive test by employee(s), blockade preventing equipment or materials from entering the country, other supply chain delays, etc.) and preserving the claim will be essential to perfecting a claim for time and compensation. It is also important to explain in the notice that a project shutdown, if necessary, is not simply the days the project is closed, but must also account for time needed to remobilize and return the project to full operation.

For example, a 14-day shutdown resulting from multiple framers or drywall installers testing positive for COVID-19, will not simply cause a 14-day delay to the project schedule, as many follow on trades will likely lose workers who cannot afford to sit and wait for the project to reopen, or employers may need to shift those crews to other projects and will require time to get their crews back to full capacity once the project is re-opened.

Blockades involving materials may last seven days, but the downstream impact on clearing customs or additional quarantining or cleaning of materials prior to release from their port of entry must be included in the analysis and the ultimate request for additional time. Until the delay is fully realized and impact determined, it is important to qualify any request or update with language reserving the right to increase the duration and compensation being sought. Again, open dialogue and information flow is essential to the process.

Given the current climate, it is important for owners, developers, contractors and subcontractors to discuss possible impacts of a pandemic-based forced majeure event to allow all involved to properly plan for potential impacts to the project. From an owner’s perspective, planning for these potential eventualities means obtaining or creating a mechanism to access funds that can be held as a contingency against possible compensable delay events resulting from a pandemic. Typically, these contingency funds would be owner-controlled and for their use if not spent during the project, but having those funds pre-planned will create a much better environment for a discussion of the costs and expenses resulting from a pandemic. This will also allow the owner to plan for potential ramifications for a later than expected completion or provide a mechanism to access funds to use for acceleration to maintain the project schedule.

All in all, the best advice is to have candid discussions with all involved early and take all steps reasonably and fiscally possible to protect the project and respective businesses from the possible impacts of a pandemic. The more direct the discussions that are had prior to the contracts being entered into and project commenced are, the easier it will be to resolve claims in the event of a pandemic-caused delay. Contractors and subcontractors should also involve their sureties and insurance brokers in the conversation.

by Steven Gonzalez
Steven Gonzalez’s practice focuses on construction administration and litigation, real estate and commercial litigation. He has assisted clients with bid protests, contract negotiations, project administration (including claims management and preservation) and post construction litigation. Steven has tried and arbitrated complex construction and design defects, claim disputes and non-payment cases. He has also negotiated numerous construction contracts, including construction management, architectural services, design-build and general contractor-owner contracts.

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