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Law360 (December 9, 2020, 5:24 PM EST) --
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| James Barriere |
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| Chad Caplan |
The pandemic has placed a tremendous strain on federal and state funding for public works and infrastructure projects, and on private funding in the academic, health care, industrial, commercial and residential sectors.
Projects that are currently underway have been disrupted due to the impact of the pandemic on work force productivity and material procurement, and the associated impact on project schedules and budgets. For legal practitioners in the industry, the pandemic will undoubtedly generate more issues and disputes on current projects as owners and contractors struggle with decreased funding and increased construction costs.
This will require a heightened awareness of, and diligent attention to, contract and statutory claim provisions and procedures. It will also mean more mediation, arbitration and litigation. Practitioners will be challenged to work with their industry clients to develop creative solutions to resolve issues and disputes.
Projects on the horizon are being delayed, scaled back and, in some cases, abandoned. In the near term, this creates a tremendous amount of uncertainty among construction industry participants as they plan and budget for work over the next year.
In the long term, it is expected that projects that have been delayed will be placed back in the queue, which will create many opportunities but also strain already-stressed labor and material markets. This will challenge practitioners to work with their industry clients to make sure their contracts consider and account for these contingencies, which for the foreseeable future will be a new normal in the industry.
COVID-19 Impacts on the Construction Industry
According to the most recent survey conducted by the Associated General Contractors of America, three-quarters of contractors have experienced a project cancellation or postponement since the pandemic began, representing a 60% increase from the figure reported by the AGC in August.[1]
The American Road & Transportation Builders Association reports that $9.6 billion in infrastructure projects had been cancelled as of August, before the surge in COVID-19 cases this fall.[2]
Private commercial projects are similarly affected. Through October, private mega-project groundbreakings, valued at $1 billion or more, were down a total of 66% compared to last year, as owners and investors continue to take a wait-and-see approach in the hopes that market conditions will improve.[3]
As for procurement on current projects, the data is similarly troubling, with 42% of AGC members reporting shortages of materials, equipment or parts due to disruptions in trucking, rail and ocean shipments, as well as delays in domestic production and transportation.[4]
The U.S. imports approximately 70% of its construction industry building materials from China, Canada and Mexico each year.[5] These nations are facing their own pandemic-related manufacturing problems, and then must ship their finished products through disrupted truck, rail or ocean routes to arrive at U.S. jobsites, resulting in widespread delays.
The price of the materials is also rising. Nonresidential construction input prices rose by 2.3% in June alone.[6] One of the hardest hit commodities has been lumber, with prices rising 250% since April.[7] Ready-mix concrete and copper-based wire and cable prices have also increased substantially.[8] When delayed projects resume, supply chain procurement issues and material price escalations are likely to continue.
On current projects, where essential construction designations have allowed work to proceed, recent studies conclude that implementing required COVID-19 safety protocols has led to substantial declines in labor productivity.[9][10]
Approximately 42% of respondents to a survey conducted by the AGC state that some employees have chosen not to return to work due to safety concerns and/or family responsibilities.[11] Another 52% of companies are finding it difficult to fill open positions, especially for craft jobs and equipment operators.[12]
In sum, material shortages, price increases, productivity losses and labor shortages have created a perfect storm in the industry. This will require participants to formulate project-by-project solutions to meet these challenges.
It will further require the very best efforts of legal practitioners to sort through the issues and navigate their clients through these unprecedented times. As discussed below, the impacts of rising costs, delays and future uncertainties can be mitigated with careful planning.
Navigating the Impacts
Any effort at risk mitigation or avoidance must start with a comprehensive review and understanding of the specific terms of current contracts, including the allocation of risks and obligations, and options for addressing excusable and compensable delays and impacts.
Practitioners must pay close attention to contract notice provisions, change order procedures and dispute resolution provisions, which frequently establish short timeframes for submitting requests for additional costs or time, and may require specific documentation to properly support and preserve claims. Practitioners must also be mindful of state and federal statutes that may govern the timing and process for the submission of claims on certain projects.
Just because a project is temporarily suspended does not necessarily mean that contractual deadlines stop running. Nor should a party mistake cooperation, open communication or a promise to square up after the pandemic subsides for an enforceable agreement.
In the event of a dispute, the facts will be considered many months or years after the project has concluded. The first inquiry is likely to focus on strict compliance with contract requirements and procedures for the submission and preservation of claims and time extensions. Notice and claim provisions are strictly enforced in jurisdictions throughout the country.
For this reason, in addition to providing timely notice, it is critical that the required documentation is submitted. Cost and time impacts of the pandemic should be separately coded, tracked and submitted at least as frequently as is required by the contract.
Schedules should be submitted with the same frequency, tracking the durations of impacts on the specific areas of work. Project records should include detailed daily logs, progress reports and meeting minutes to further demonstrate the impacts, and to the extent possible, the efforts to mitigate them.
On future contracts, parties should insist on reasonable notice periods and documentation requirements. Schedule provisions should be tailored to account for the likely continuation of labor and material shortages and procurement delays.
Labor and material price escalation clauses should be negotiated, as well as provisions that anticipate and address extended performance costs. Successful contractors will systemize their notice and claim procedures, and will make sure their project managers and personnel are well-versed in the specific requirements of each contract at the start of the project.
Force Majeure
Most construction contracts contain a "time is of the essence" provision requiring the project to be completed by a date certain. Absent a justifiable excuse, a failure to meet the deadline can result in, among other things, liquidated damages, termination of the contract for default or involuntary supplementation of a contractor's workforce and a change order deducting the associated costs from the contract price.
Since the outset of the pandemic, significant focus has been placed on contract force majeure provisions. These provisions generally excuse a party's failure to comply with a contract obligation due to circumstances beyond its control.
Industry standard-form construction contracts, including American Institute of Architects A201 and ConsensusDocs 200, define these circumstances broadly enough to cover the pandemic. Others may not, or may be ambiguous and result in a disputable issue. In any event, each provision must be evaluated in accordance with its specific terms.
It is important to note that force majeure provisions do not guaranty relief even if a pandemic is clearly a covered circumstance. In many cases, force majeure clauses will provide no relief at all without timely notice and compliance with claim preservation provisions set forth elsewhere in the contract.
Also, the available relief can differ from provision to provision. Some entitle contractors to an excusable delay only, which extends the contractor's time for performance but does not compensate the contractor for increased performance costs. Others provide for compensable delays, which allow for extensions of time and recovery of costs flowing directly from the force majeure event, if said costs can be adequately supported.
The categories of recoverable costs may also differ under these provisions.
When negotiating future contracts, parties should make sure they are broad enough to cover the ongoing impacts of the pandemic discussed in this article. Also, the relief available under the provision must be carefully considered as well as the requirements for reserving the right to said relief.
Other Potential Avenues of Relief
The pandemic should also prompt a review of existing insurance policies to assess the scope of potential coverage. Some policies contain business interruption coverage for lost revenue in the event your business is forced to close, although many policies require a physical loss as a triggering event (i.e., property damage).
Policies should be reviewed to determine whether pandemic-related losses are within the scope of coverage. Several jurisdictions are contemplating legislation that could retroactively make COVID-19 a covered event under certain policies. These legislative efforts should be monitored.
Owners may want to consider procuring payment and performance bonds. Payment bonds guarantee payment to subcontractors and vendors providing labor and materials on a covered project. Performance bonds cover the cost of completing the work in the event of a contractor default. Although bonds are already required in most jurisdictions for public work, private developers should consider bonded products as well in light of the current uncertain environment.
Suspension and Termination Considerations
As discussed above, many owners have suspended projects either voluntarily or due to governmental shutdown orders. Parties should carefully review contract suspension and change of law provisions to understand their rights and obligations and consider potential unintended consequences.
The AIA A201 and ConsensusDocs contracts both specifically provide a right to compensation for contractors in the event of delays arising from an owner's suspension of work. Owners may also face liability for contractor and subcontractor remobilization costs, material and equipment storage costs, labor and material escalation costs, and costs associated with long lead items and special orders that cannot be canceled.
Also, many suspension provisions provide contractors with the option of terminating the contract in the event the suspension extends beyond a fixed period. Owners must, therefore, undertake a careful cost/benefit analysis before voluntarily suspending work, as construction costs tend to increase rather than decrease in the event of a suspension.
For contractors, upon receipt of a suspension notice, it is imperative that they assess and implement contract requirements for protecting the site, existing work, materials and equipment, as well as the work of others, to avoid liability for subsequent damage. They should also evaluate avenues for the recovery of costs incurred prior to and resulting from the suspension, and options for termination and the recovery of costs for extended suspensions.
Finally, in the private sector, where hospitality and retail have been hit particularly hard by the pandemic, contracts for work on these projects could be terminated by owners for convenience. The termination provisions of the contract will govern notice, timing and cost recovery, and should be carefully reviewed and followed.
Conclusion
While the most devastating toll of the COVID-19 pandemic has been the loss of human life, the construction industry is facing a drastically altered risk environment as it applies to funding, labor shortages, material procurement delays, suspensions and terminations, and their impacts on project costs and delays.
Industry participants can best protect their rights during these turbulent times by carefully analyzing and understanding their existing contracts and insurance policies, employing available risk mitigation measures and negotiating future contracts to account for previously unanticipated possibilities.
Legal practitioners in the industry will be challenged in 2021 to sort through the many issues and develop creative and effective solutions to address them.
James Barriere is a partner and Chad Caplan is an associate at Hinckley Allen & Snyder LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.enr.com/articles/50527-agc-says-75-of-contractors-had-project-canceled-or-postponed-due-to-coronavirus.
[2] https://www.constructiondive.com/news/96b-worth-of-infrastructure-projects-delayed-or-canceled-during-covid-19/582713/.
[3] https://www.constructconnect.com/blog/10-mid-november-economic-nuggets-with-a-focus-on-mega-construction-projects.
[4] https://www.enr.com/articles/50527-agc-says-75-of-contractors-had-project-canceled-or-postponed-due-to-coronavirus.
[5] https://www.gep.com/blog/strategy/the-impact-of-covid-19-on-building-materials.
[6] https://www.constructiondive.com/news/materials-prices-rise-for-second-straight-month-since-covid-19-crisis-began/581449/.
[7] https://www.enr.com/articles/50219-q-cost-report-lumber-prices-soar-as-construction-begins-to-recover.
[8] https://www.enr.com/articles/49803-material-and-labor-cost-index-falls-in-july.
[9] https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/; https://www.enr.com/articles/49619-analysis-covid-19-causes-35-productivity-loss-at-uk-projects.
[10] https://www.gep.com/blog/strategy/the-impact-of-covid-19-on-building-materials.
[11] https://www.agc.org/news/2020/09/02/coronavirus-has-caused-significant-construction-project-delays-and-cancellations-y-0.
[12] Id.
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