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Law360 (August 21, 2020, 8:21 PM EDT) -- In this edition of Coronavirus Q&A, Shutts & Bowen LLP's construction practice group leader discusses the impact the pandemic has had on the construction industry and the reactions and adaptations of its various interest holders.
Woodward, who focuses his practice on commercial construction litigation, shared his thoughts as part of a series of interviews Law360 is doing with lawyers to discuss the ways the COVID-19 pandemic has impacted businesses and created new legal questions and challenges.
This interview has been edited for length and clarity.
What parts of the construction industry does your practice group serve?
We represent really everyone from the major home builders to some of the largest general contracting firms across the country on major infrastructure projects — roads, bridges, dams, airports — as well as homebuilding projects, commercial development, retail, high-rises, condominiums. Basically, the whole gamut.
We represent owners, contractors and the major designers — the architects and engineers — on both the litigation side, where we're involved in the claims, and in the project-planning and risk management side, where we help to set up the business entities, negotiate the appropriate construction and development agreements. We're also involved on the transactional side as well.
What was the state of the construction industry before the new coronavirus emerged?
From our perspective, thing were screaming. That would be a word I would use. People were busy, there was a backlog of work, there was a shortage of skilled trades in a number of jurisdictions. Contractors had some trouble sometimes finding qualified supervision to run all of the work that they had. Designers had substantial work for a long way out. And owners, together with their lenders, were pretty aggressive about going after opportunities.
What sort of restrictions has the pandemic put on the industry?
The biggest restriction that I think the COVID era has placed on the business is fear and uncertainty.
Uncertainty isn't very good for construction, and that's certainly had an impact in various ways. But it has not crushed the industry. Our client base has stayed pretty active and pretty successful. They probably have not been impacted as significantly as they would have anticipated.
But in terms of the added protocols that many businesses talk about and many have heard about — temperature checking of employees, the need to socially distance, the need to wear a face mask — most of our construction client base has been able to readily adapt to that more easily than other industries because construction, as a whole, has always been a pretty heavily regulated industry when you take into account codes and permits and [the Occupational Safety and Health Administration] and everything else. So some extra requirements really haven't stopped progress. They just had to be accepted and adapted to.
In terms of construction sites, how hard have they been hit from a personnel standpoint by outbreaks or other restrictions?
It's really varied. You know, a lot of these guys come together to work riding literally in the same van, not socially distant at all. They're inches apart, and when one of them tests positive, everyone presumptively is.
If you have an entire crew that can't progress the roof work on a building, well, the roof is critical. That affects the end date, it affects other trades that would have been working but can't because the roof's not done. So when it does impact a project, it's a pretty immediate and significant impact.
But not everybody's been hit. It's kind of hit or miss. I've got clients with major projects that are mostly outdoors. Road and bridge work seems to have been impacted less than the interior trades where they're building out the inside of a building, for probably obvious reasons.
What are some other challenges that the industry has had to deal with from an operational standpoint? I've heard that the availability of building materials has been an issue in some cases.
Almost everything that matters in construction is related to time. Time is money. Time is of the essence. In construction, those phrases are not just fancy words. It's the reality. So when you have impacts like the crew that gets sick and affects the critical path of the job, that's significant, just like supply chain issues.
For instance — this has impacted a number of folks — some of the major air conditioning unit manufacturers stopped production because of COVID for a period. If you can't get the equipment, you can't finish. It doesn't matter how hard you work. If you don't have the right tools or equipment, you can't be done.
It's really made construction executives and managers collaborate more with the owners that they're working for to resequence the work and to do things differently than they would have otherwise planned, because people didn't see this coming. But again, construction is a little better at adaptiveness than some other industries, I think, because there are usually some hiccups experienced along the way, despite the best planning.
What are ways you have seen clients adapting?
Much of it is customized based on what the issues are, so it's case by case, but what I would say is more of a general trend is there's a greater collaboration between the contractor and the owner, which is often more of an adversarial relationship.
Understand, contractors get their work often by being the lowest bidder, not because they're best friends with the client, their owner. So, in today's market, because of these uncertainties and unique issues that are COVID-related, it's kind of forcing contractors to work a little more hand-in-hand with their owner-clients to adapt and overcome.
Where we see that has really manifested itself is our contractor clients turning to their owner clients and actually seeking to get feedback and buy-in from one another. And then as a result, basically in consideration for closely working together and keeping the owner updated as often as possible about what's happening, the owners are being a bit more magnanimous about how they're evaluating the contractors' entitlement to additional time — as I said, time is key in construction — and/or dollars.
Under many contractors' and designers' contracts, COVID isn't a compensable issue, but the owners are being a little more understanding and magnanimous when they're getting greater collaboration from the contractors. So you're catching more flies with honey these days than you are with vinegar, if you're a contractor.
How do you think that compares to other industries? Do you think the various parties in the construction industry have adapted and worked better together?
At least for our client base, a lot of the projects tend to be a little larger, and there's just such a significant investment by all parties — the designer, the contractor and the owner — that they're trying their darnedest. Everyone has an interest in seeing this through and figuring out how to get it — like the 'We're all in it together' concept actually has translated into a bit more of a reality in construction.
There's a lot of disputes in construction, and there still will be, but to get through the COVID impact, I think folks have really come together more and fought less in construction than they have, for instance, in the landlord-tenant arena.
Between dealing with the disease itself and dealing with the broader economic impacts of the pandemic, what differences are you seeing between different project sectors?
From my perspective as a lawyer, which in fairness isn't going to be as great as the people who really have boots on the ground out there, I see that infrastructure-type projects are more, I guess you'd say, socially acceptable.
People are accepting that people are working on roads, bridges, wastewater treatment plants and other things that we all need to continue functioning as a society. That gets more support from the government and just from the public at large than does, say, a new multifamily, apartment-style complex, where people are working in closer proximity and there's a greater outcry of "Why are they doing that? Do they really have to do it right now?"
Also, the state of Florida, for instance, and the department of transportation, they've accelerated various infrastructure projects, including for some of our clients, who are being asked to build faster than they ever planned to, to take advantage of some of these opportunities where there are less people on the roads and there's still a need to do these things.
But there really has been a lot less of a drive or a governmental influence to push and move faster the private projects. The funding for the infrastructure projects often comes from the government, which — say what you will about the government — it's still a safer bet than relying on those who are relying on their lender to release money to them to in turn pay the contractors.
Has there been more of a tendency to delay projects to see what happens or are projects being outright canceled?
It is both. There are some that are put on hold: Basically take the design plans, put them on the shelf, we'll talk about them next year when everybody's more comfortable.
There's definitely some projects that hadn't broken ground that have been suspended, or I guess "canceled" would be the word, but probably with the intent of doing them again later. People just didn't want to proceed in light of the uncertainty that exists.
For the projects that had already broken ground and were ongoing, it's a much harder decision to stop those projects and then pick them up again later, because there's a huge expense associated with leaving a half-finished construction project and then trying to pick up where you left off. It never happens that easily.
Most of those projects that were ongoing are still going, and the bigger issue is can they still be completed on time in light of impacts that are happening to our society as a whole — people getting sick, supply chain issues, some lending issues.
That drives a lot of it, too. Money talks, and if the money isn't flowing, that also results in fewer projects and more delays in getting things going as well.
Touching there on the money side of it, what are you seeing in terms of the challenges in that respect?
The lenders, the ones controlling the purse, are clutching the purse strings a little tighter because of the uncertainty or fear as to what's going to happen next. So where some of our owner/developer-type clients might have had better ability to work with and cooperate with their lender even when they're in situations like claims from contractors or designers — they would probably be more on the same team — it's a little harder to do these days.
And in a number of instances — not across the board, but a number of instances — the lenders, they're nervous and they want to see stricter compliance with loan agreements than was the norm. These agreements that loan money for major construction projects are typically voluminous, detailed and generally favorable to the lenders, but pre-COVID, they weren't always strictly and literally interpreted by the lender. There was some latitude. My group's experience is that there's less latitude these days because of that uncertainty.
From a legal perspective, what trends are you seeing in terms of litigation? What types of disputes are common or on the rise and how are they being handled?
I'm seeing that clients, particularly in terms of major claims, they will ask us as their lawyers to help them do cost/benefit, pro/con analysis before they really get involved in claims, and part of that analysis is a function of time — When am I going to get to the finish line with a claim that I may have against someone else on a construction project?
And we are really having a hard time having confidence in providing estimates as to how long it's going to be. We've already had courts close and jury trials suspended longer than people anticipated initially.
By January 2021, I would think people would assume that we're all going to be in courthouses across the state doing business as usual again, but by then, there's such a backlog of things that didn't get accomplished during 2020, that will have a major impact on the judiciary's ability to have hearings, to progress cases, to have trials — whether they're bench or jury — and the amount of attention that the judiciary can give each case, no matter how big it is.
So what I see as a trend in the industry as well is that the party wanting money — the plaintiff or claimant — is a little more amenable to talk settlement than they may have been under different circumstances, because they'd like to have some certainty even if they take a little less than they think they are due. They'd rather have the certainty and put the money in their pocket today.
The secondary part of that is more parties are finding alternative dispute resolution — whether it's going to mediation to try and settle or submitting their claims to arbitration, or even a private judge and having someone other than the court system decide the case on a more definitive expedited basis — is more attractive than it was before.
There were always tons of pros and cons there, but this is now a greater pro for going that direction toward arbitration as opposed to court because you can control the system a little more. The backlog isn't going to be as bad, you're paying your arbitrators, they will give you attention.
And are there any particular types of matters that you have noticed are on the rise or expect to see increase in the near future?
We certainly had a rush, and it's probably already slowed some, of evaluating force majeure provisions in contracts to determine who bears the risk of COVID. But that, more or less, was early on and most parties have figured it out by now.
Anytime the economy takes a dip in construction, then parties who are owed money have less tolerance to wait for it. They're going to exercise their lien rights or bond rights and bring their claims earlier to make sure they're the squeaky wheel. So there's an uptick in people trying to get paid for the work they've already done. They're not willing to wait for that receivable to be really old before they call us, their lawyers.
If a successful COVID-19 vaccine or treatment came along, what sort of an effect would that have on the construction industry right now?
If there was a certainty that there was a fix, that everyone could take a magic pill and it wouldn't affect anyone anymore, then I think there would be less fear and uncertainty for long-term projections, which has a significant domino effect in the industry and a favorable one.
It would be a good thing for everybody, but in construction, there would be a better willingness to loan money, there would be more willingness to take business risks, to merge with other firms, to bring in new divisions, to hire top talent, because you know that there's still a sunny day again tomorrow. If you're afraid it might still be raining, you're less willing to invest in that future. So yeah, if you've got the vaccine, let us know what it is. You'll be a hero.
--Editing by Kelly Duncan.
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