Articles, Newsletters and Advisories
(by Marc Felezzola)
The COVID-19 pandemic has resulted in a “new normal” that was likely not accounted for in pricing and scheduling for projects awarded prior to the pandemic (“existing projects”). As owners and contractors move forward with new projects in a post-pandemic world, there is incredible uncertainty to what extent COVID-19-related requirements will impact future projects (“Future Projects”). This article addresses some of the major risks that owners and contractors face on both existing projects and future projects.
The forced COVID-19 shutdown and subsequent resumption of existing projects will likely result in costs to contractors for demobilization and remobilization, downtime/standby, possible material and labor escalation costs, and extended general conditions (“primary impacts”). These primary impacts typically arise with every suspension or delay to a project and are not unique to COVID-19 forced stoppages. Whether and to what extent these costs are recoverable by contractors depends on the terms of the applicable contract, and in particular its force majeure language. However, because a force majeure event is by definition an event not caused by the owner or contractor, the parties typically bear their own costs associated with the delay caused by the force majeure event. The contractor cannot recover its delay/suspension costs but does get a schedule extension; and the owner cannot recover any costs it incurs as a result of the delay. If nothing else, the contractor will almost certainly be entitled to a change order extending the project schedule for at least the length of the forced shutdown.
Beyond the primary impacts are the costs and schedule impacts associated with resuming work under drastically different circumstances. These impacts range from new social distancing requirements and correlating prohibitions (e.g., limiting use of an elevator at the job site to one worker at a time; prohibitions on sharing equipment) and potential manpower caps (e.g., limits on workers allowed in enclosed portions of a job site in counties that remain in the red or yellow phase; government imposed limits on gathering sizes) to added direct job costs for handwashing stations, thermal scanners, and additional sanitization and personal protection equipment (“secondary impacts”). The aggregate result of these secondary impacts will be a reduction in efficiency, a forced change to contractors’ as-planned means and methods, and an increase in contractors’ direct job costs, all of which will result in a contractor seeking a change order for additional costs, additional time, or both.
On top of the primary and secondary impacts are indirect jobsite impacts in the form of material and equipment supply chain disruptions due to factory and manufacturing facility shutdowns or slowdowns, potential workforce shortages due to pandemic-related illness or concerns, and corresponding increases in materials, equipment, and labor prices (collectively, “tertiary impacts”). Some of these tertiary impacts will not be fully realized immediately, and each will further magnify the schedule impacts and additional costs discussed above.
At the same time, the post-pandemic world will look very different for owners. Certain projects previously fast-tracked as guaranteed revenue generators may lose their luster (e.g., movie theaters, certain restaurant projects, and some energy-related projects) prompting owners to voluntarily suspend the project even though construction may resume, or even terminating the project for convenience. For other projects, owners will want to consider whether to pay for acceleration measures to recover the time lost to the forced shutdown, or at least maintain the as-planned durations for construction work and limit any delay in completion to the time of the forced shutdown (i.e., pay for acceleration efforts necessary to offset schedule impacts of secondary and tertiary impacts). Social distancing requirements, potential manpower caps, and uncertainties surrounding available workforce members may hinder acceleration efforts; at the very least, it will likely make them more difficult and expensive than they would have been pre-pandemic.
Moreover, there remains significant potential for the forced shutdown of a particular project due to a potential or confirmed COVID-19 case at the jobsite. Similarly, the potential for another industry-wide shutdown looms with the threatened resurgence of the coronavirus in the fall. On the other hand, as the number of new COVID-19 cases continue to drop and restrictions are eased, contractors may begin to return to more and more pre-pandemic efficiencies and practices. Needless to say, the path forward remains uncertain.
B. Steps Owners and Contractors Can Take to Mitigate Impacts and Future Risks
What steps can owners and contractors take to address the above impacts and mitigate against future risks for existing projects?
Project owners, contractors, and all major subcontractors should meet to discuss the “new normal” of the post-pandemic landscape and reset project expectations. During this meeting, the parties should establish new safety protocols and procedures that comply with all relevant OSHA, CDC, state, and local governmental mandates. The Construction Industry Safety Coalition published a model COVID-19 Exposure Prevention, Preparedness, and Response Plan for Construction (available here: http://www.buildingsafely.org/wp-content/uploads/2020/04/CISC-COVID-19-Exposure-PreventionPreparedness-and-Response-PlanVersion-2-4838-8641-5802-3.docx) that may serve as a good starting point. The parties should also establish a new, workable construction schedule in light of the currently known circumstances and impacts. The parties could also consider what, if any, equitable price adjustment(s) they agree upon to address the secondary and tertiary impacts to contractors along with any owner-desired acceleration efforts the owner wants. As part of the equitable adjustment discussion, contractors and subcontractors should be prepared to discuss any mitigation efforts (and associated costs) available to overcome disruptions to supply chains, including alternative sourcing for key equipment to alleviate or overcome any delivery delays due to pandemic-related factory closures. Finally, the parties should consider establishing a contingency to account for potential future shutdowns and a plan for how to share savings, if any, realized by continued loosening of pandemic-related limitations.
Although collaboration and agreement on equitable adjustments will likely result in a more harmonious project, we anticipate some owners (and contractors with respect to their subcontractors) will cite no damage for delay language and force majeure language in their contracts to refuse price adjustments as a result of schedule impacts resulting from the pandemic. Contractors and subcontractors will respond by pointing to differing site conditions language, change in law clauses (to the extent their contracts have them), or other contract provisions entitling them to equitable price adjustments. In the event the parties do not agree about whether an equitable adjustment in price is warranted (or cannot agree on the amount of adjustment), contractors and subcontractors should strictly comply with any claims notice provisions in their contracts and keep track of all additional expenses, including expenses due to loss of efficiency or changes to as-planned means and methods, using a force account.
The outcome of disputes over the propriety and amount of equitable price adjustments will ultimately turn on a number of factors, including the relevant contract language. However, owners and contractors should expect judges, juries, and arbitrators to be sympathetic that contractors’ and subcontractors’ pricing did not contemplate and account for COVID-19 impacts and it may be unfair to saddle them with those costs when they are incurred for the benefit of constructing the owner’s project. Thus, owners should expect courts, juries, and arbitrators to look for ways to provide at least some price relief to contractors and subcontractors even in situations where the owners have the most stringent contract language in their favor.
Parties to contracts for future projects will no longer be able to claim that they could not expect or foresee pandemic-related impacts. Beyond that, the impact of COVID-19 on future projects remains uncertain. Will new cases of COVID-19 continue to drop? Is a vaccine or therapeutic treatment on the horizon that would enable an even more accelerated return to the status quo? Will loosening of restrictions and cooler temperatures result in a “second wave” of infections?
Because of these uncertainties, in addition to agreeing upon safety protocols and procedures for addressing COVID-19 risks and potential exposure at the jobsite, parties negotiating construction contracts should include a pandemic contingency specifically earmarked for addressing and covering unanticipated costs due to pandemic-related causes. The parties can negotiate language to address how and when the contingency monies are to be distributed; how to distribute any unspent contingency monies (i.e., “savings”); and whether, and to what extent, the owner is obligated for pandemic-related costs over and above the contingency amount. This can also be considered a learning experience to highlight that “force majeure” clauses should be considered carefully and drafted to reflect the true intent of the parties.
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