Construction Contract Tips For Allocating COVID-19 Risks
By Jonathan Head (June 12, 2020)
This article looks at some strategic and prudential ways to use the claims that will certainly flow from COVID-19 for the greater benefit of both owners and contractors.
Advice for Owners
There are by now dozens of articles talking about whether the pandemic fits into most construction contracts' force majeure clauses. The articles discuss whether the relief could be time and money, instead of just time, and all the nuances arising under such clauses.
But many other, more fundamental, contract issues, such as fixed price and schedule terms, have received less coverage. There has been practically no mention of the prudential question of whether exercising a clear contract right makes sense when the countervailing facts of the pandemic are so compelling.
This article applies the construction buyer's classic criteria — "I want it good, fast and cheap" — and suggests that more enlightened construction owners may think twice before exercising remedies that cost them more money in the long run.
Delay issues have received most of the attention in the legal press, and not without reason. While owners with restrictive delay terms may snuff out some claims, a legal decision maker will likely favor claims that COVID-19 delays were not foreseeable. One might imagine a bench or arbitrator comment of, "What part of global pandemic is confusing to you?" The inspection difficulties mentioned above can also easily result in project delay.
Of course, COVID-19 has disrupted the famously complex supply chain of construction and of modern American industry in general. Suppliers of material and equipment cannot keep their promises with their usual certainty. They, too, are managing risk and relying on their typical strategies during disruptions.
Suppliers are placing buyers on allocation, increasing delivery durations and pricing with risk premiums, which are likely to only continue when, as of this writing, there are also political demonstrations, some of which have resulted in riots, occurring in major American cities.
The skilled labor force, which has been tight for years, remains tight — though perhaps for different reasons — and labor productivity suffers consequently. Faced with such delay issues, traditionally an owner would say the contract's language requires a firm delivery date and, absent specific relief in the contract, those risks don't belong to the owner.
They might try to shoehorn everything they couldn't defeat outright into force majeure; indeed, many have, tacking on threats of termination for convenience sometimes if contractors do not capitulate. This risk may be very large for contractors who do not typically negotiate a termination fee.
However, such an owner is likely to deliver to the market later than its pro forma planned to, despite a firm application of pressure. Again, contractors are keenly aware that the circumstances are unprecedented and will apply their resources where they can benefit most, hoping for legal relief, and not unwisely, because of good facts.
Quality issues do not spring to mind first when addressing the pandemic, but they are likely to occur. Contractors may not be able to get the highest-quality workforce, either because they can't arrive at the job site or because the workers don't feel secure working right now. There are significant sectional differences in workers' opinions on these issues. In my home state, these sentiments don't prevail as they may elsewhere.
Some jurisdictions and some owners are enforcing quarantines on out-of-area workers, claiming that force majeure should subsume this seemingly straightforward operational change.
One implication of a shutdown is the difficulty of getting inspections. Local governments are among the most cautious about returning their heavily unionized workforces to their tasks, including inspections. These issues are not under a contractor's control.
But can't an owner just take the position that it's the contractor's problem to satisfy the specifications? Such an owner will likely see its job fail more inspections and deal with more nonconforming work. Sorting out project failures with multiple, conflicting causes is always difficult and will be more so in the disputes growing out of the pandemic.
Cost issues are intertwined in all the issues raised above. Nervous workers may want hazard pay to work under stressful and uncertain conditions. Suppliers may be willing to ship on original schedules, for a premium. Transport costs may also rise for special arrangements, despite the price of oil cratering in the market. Many large-scale transport companies work under long-term contracts and the disputes arising from the oil glut won't have worked their way through the system quickly enough to lower these costs substantially.
"But I've got a lump-sum, fixed-price contract," says the traditionally minded owner. True. And rational builders are going to find ways to cover their unexpected costs. The owner likely will face more disputes, harder change order negotiations and less cooperation when needed at critical points. The truism that construction is a team sport is never truer than when crisis strikes.
Playing Hardball: What's the Alternative?
The overall result of using contract leverage right now is probably a race to the bottom. Heavy-handed owners who don't distinguish between useful and useless changes won't have as much product available to a limited market and will have weaker relationships with the contracting supply chain.
Contracts are for foreseeable circumstances and risks. To the extent parties identified uncertain risks and assigned those risks plainly, then parties should live by them. But many contracts have enough play in the joints that enticing facts will get legal decision makers to grant relief from strict terms. Experienced construction law practitioners know many contractors have achieved relief with far less factually in their litigation quiver.
While we can't throw the contracts out, we can pick battles carefully. In a time of scarcity, the worst fight to pick is one you can't win. Even a tie in a dispute can distract from better business opportunities. This of course applies to both contracting parties, but this article assumes a preponderance of contract advantage exists with the owner, as is often the case.
Owners, examine whether the grant of time or money relief that the contractor seeks from
you creates throughput for the project. Is there return on investment in the request or can you negotiate until there is? Is the contractor truly trying to escape its responsibility for a contract risk, or is it a victim of circumstances, as we all are to some degree or another?
As ever, it is people who apply the law. Some of those people have experienced great disruption and loss, opening them up to change-based arguments. Good business prudence will account for that possibility before taking a hard position on a clear contract term that costs all parties more money in the long run.
Advice for Contractors
Seek relief, but don't try to balance the books using this disruption. There is little question that COVID-19 presents some form of changed condition for most construction projects. Hopefully when you gave notice two months or more ago, you said that you don't know what you don't know, then and perhaps still right now. There are three main issues to consider when giving notice, which you have hopefully done by now on every project you have, regardless of the stage or status.
1. Could your contract allow this to be a time-and-money change order? While most contracts lump epidemics into a force majeure clause that gives only time, some contracts allow time and money. Also, you should discover whether your clause has an exclusive list of force majeure events that does not include epidemics.
2. If your contract does not allow time and money for epidemics, do you have another time-and-money impact right now? If your owner's defective design or a differing site condition is currently delaying your job, you may be handing the owner a concurrent delay, thus giving up the monetary recovery, if you apply for relief today. On the whole, given the extent of the COVID-19 outbreak and its unknown duration, you are likely better off giving the notice anyway. But think hard about giving it if you have a solid owner-caused delay in hand.
3. If you can only recover time, it is probably best to leave your request open-ended, while detailing all the impacts you currently know or can reasonably foresee today. If you know you have suppliers in Europe or China, say so today — it's only fair to give as much notice as you can so owners might decide to pay for acceleration where delivery can't slip.
Here is sample language you might adapt to your needs:
Change Order for Issue No. 1 Situations
Under Article X of the contract, the outbreak of COVID-19 is a changed condition that gives Contractor the right to time-and-money relief. Currently, the known impacts are [give details]. However, because this is a global pandemic and our construction supply chain is very complex, we don't know what we don't know right now. We will continue to monitor the disruption and will report back reasonably as we learn of additional impacts. Note that due to other disruptions in the supply chain, it is very important that the owner process payment timely for change orders right now, as many subcontractors may be losing work and experiencing financial difficulty due to the pandemic.
Change Order for Issue No. 2 Situations
First, maybe don't send one; see above. If you do, try to thread the needle with something like this:
Under Article X of the contract, as you know, Contractor is currently entitled to a change order for differing site conditions. Currently, the known impacts are [give details]. However, in an abundance of caution and without currently knowing what the impacts (if any) may be, Contractor also gives notice that the COVID-19 global pandemic will likely impact this project. Because this is a global pandemic and our construction supply chain is very complex, we don't know what we don't know right now. We will continue to monitor the disruption and will report back reasonably as we learn of additional impacts.
Change Order for Issue No. 3 Situations
Under Article X of the contract, the outbreak of COVID-19 is a changed condition that gives Contractor the right to schedule relief. Currently, the known impacts are [give details]. However, because this is a global pandemic and our construction supply chain is very complex, we don't know what we don't know right now. We will continue to monitor the disruption and will report back reasonably as we learn of additional impacts. Note that it is important for the owner to process this change order now to avoid placing Contractor and subcontractors into a constructive acceleration condition, which could create labor productivity impacts and lead to claims for monetary relief.
This section of the article is much more tactical than the owner section. Why? Because owners likely have an already substantial tactical arsenal of contract provisions, which this section helps to address.
There is never a substitute for being reasonable in changed and challenging project circumstances. No one is clairvoyant enough to foresee every low-probability/high-severity risk, such as COVID-19. If both sides will give a little to achieve their broader strategic goals, each will arrive at a more favorable outcome.
Jonathan Head is a partner at Weinberg Wheeler Hudgins Gunn & Dial LLC. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.