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With sources predicting that construction employment will be the hardest hit of all industry sectors, contractors are facing challenges from all directions as COVID-19 disrupts the global economy. In an industry where it is always important to mind every penny, it is more critical than ever for contractors to preserve and protect rights to additional compensation and schedule relief. The variety of disruptive events has implicated a range of contract terms several layers deep. Contractual notice requirements have come into great focus as those disruptions are impacting means and methods in ongoing projects.

As the virus moved through China and into other neighboring countries, the concern was about supply chain disruption, which forced contractors to look closely at their agreements for the terms that provide schedule relief. E-mail inboxes received a deluge of updates regarding force majeure provisions and common law impossibility doctrines as the growing pandemic froze or slowed material deliveries and threatened the labor supply. In front of this wave, Construction Executive addressed this topic on March 10. 

As the virus spread throughout the United States, various shelter-in-place or stay-at-home orders forced some projects to shut down entirely. In jurisdictions where government action forced projects to stop, contractual termination and suspension terms came into immediate focus. The more reasonable contract terms in place, such as those in the market-leading American Institute of Architects family of contract documents, provide mandatory compensation and schedule relief in the event of suspensions and convenience terminations. Under these terms, the contractor is not obligated to provide notice that a suspension or termination will impact schedule and costs.

In the A201-2017 General Conditions, Article 14.3 provides that the owner has the right to suspend work and that the owner “shall” modify the contract sum and contract time accordingly. Profit is included. Article 14.4 gives the owner the right to terminate for convenience and provides that the owner must pay for completed work and termination costs. Thus, the process moves directly to quantifying and paying for those impacts. As contractors have seen, not all agreements include such favorable terms. And the AIA form can be improved by specifying the types of compensable costs in the event of a termination.  

Where projects have continued with social distancing requirements in place, contractual notice terms that govern schedule relief and additional compensation are critical. For example, Ohio’s Stay at Home Order took effect on March 23. Here, the industry breathed a sigh of relief as it became clear that the order permitted construction work to continue. But that order was also clear that contractors had to observe social distancing requirements, and that is where the new challenges began. Weeks have passed, and contractors have now seen how those social distancing requirements have impacted their means and methods. Through all of this, the pace of work has slowed and its cost has increased. 

In states such as Ohio, the law strongly favors the enforcement of contractual terms, as the courts have favored project owners and their need for cost controls. Absent clear evidence of a waiver, Ohio’s courts will strictly apply those requirements even when the consequences for the contractor are extremely harsh. In the leading case, Foster Wheeler Enviresponse, Inc. v. Franklin County Convention Facilities Authority et al., 78 Ohio St. 3d 353; 1997 Ohio 202; 678 N.E.2d 519 (1997), a contractor removed extra contaminated soil at a cost of $939,690.00, but did not receive additional compensation because it did not adhere to the contract’s extra work terms. Thus, in many jurisdictions the penalty for non-compliance is high. 

With Foster Wheeler and cases like it in mind, contractors must be diligent. To do so, they must work through several layers of contract terminology to understand the requirements that must be met to obtain additional time and compensation. 

Layer One—Entitlement to and Measure of Schedule Relief

In Article 8.3.1 of the AIA A201-2017 General Conditions, the contractor may obtain a schedule extension for certain causes, with the duration to be determined by the architect. Though not specifically referencing pandemics or government orders, the triggers include “unusual delays” and “causes beyond the contractor’s control.” The burden is on the contractor to present a claim for an extension in accordance with Article 15. 

Layer Two—Timing and Recipients of Notice

Under Article 15, “Claims” are defined to include both requests for schedule relief and requests for additional monetary compensation, and the burden of substantiation is on the party making the claim. That party must submit the claim within 21 days of the earlier of the date that it recognizes the condition or the date that it experiences the occurrence giving rise to the claim. It must submit the claim to the other party and the initial decision maker (if any) with a copy to the architect (if the architect is not serving in that role). 

Layer Three—Form and Manner of Delivery

Article 1.6.2 defines how (certified mail or courier), to whom (the designated representative), and in what form (in writing) the notice under Article 15 is to be delivered to be effective. The specific provisions of the owner-contractor agreement, such as the A101-2017, identify the designated representative and his or her address. Keep in mind that the claimant bears the burden of substantiation, so that written notice should include at least an initial measure of supporting narrative and documentation. 

Working through these three layers only serves to preserve the right to entitlement that is discussed in the first layer. In other words, a contractor must walk through all three layers carefully just to preserve the right to a schedule extension or additional compensation. Additionally, a fourth layer may be imposed by the contract because social distancing requirements may change over time, creating an ongoing disruption and implicating special terms for such a disruption. Again, passing through the three or four compliance layers merely preserves the right to have the substantive discussion regarding the measure of schedule relief and additional compensation. 

Owners taking a hard line may dismiss a claim in its entirety due to a technical notice mistake and fall back on Foster Wheeler and similar cases for support. Construction project participants should all develop their own play book that defines the actions required when faced with certain events. They are wise to understand the law of their jurisdiction as applied to their contractual terms in doing so. It is not unusual for sophisticated and hard-nosed owners to have a play book that calls for claim denial where notice requirements are not met. The play book can take the form of a contract summary that identifies trigger events, deadlines and subsequent requirements. 

These same concepts apply to specialty contractors looking to their subcontracts for relief. And, the critical terms in non-AIA or modified AIA documents are often much more one-sided than those summarized above. Take the case of a recent owner-contractor dispute, where the agreement was on a custom form prepared by the owner. Claims were segregated based upon whether they related to a differing site condition, a generic cost impact and a generic schedule impact. Written notices were to be delivered, respectively, prior to disturbing the condition, prior to proceeding with the extra work, and within 48 hours of a schedule impact. The owner and architect were then to inspect the site conditions or, for the other two claims, receive specified back-up either within the notice or within five days of that notice. The contract stated specifically that the owner had no obligation to modify the schedule or the price if the contractor did not obtain its consent.

General and specialty contractors can all review their agreements to identify the controlling terms on the subjects discussed above. From there, they can create a play book for how to deal with each event. They can develop notice templates that are then modified for each situation to cover the contractual requirements. If staff is not able to do this, counsel can provide training and documentation that can then be modified from one project to the next. In this way, contractors can mind every penny and position themselves to survive the many challenges presented by the COVID-19 pandemic. These practices are just as valuable when faced with the more ordinary project disruptions. 

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