Coronavirus Construction Delays & Disruptions: Managing Risks

The coronavirus outbreak remains an evolving global concern, and while its effects are felt widely by people and businesses across the world, those in certain industries are paying close attention to COVID-19’s potential for future loss and litigation.

That’s especially true for those in the construction industry.

COVID-19’s Impact on Construction

As cities, states, and the federal government implement more aggressive social distancing policies to contain stress on health care systems, contractors in some jurisdictions are already feeling immediate effects. That includes Boston, which became the first major U.S. city to shut down construction projects, Disney announcing it would shut down construction operations at its flagship Disney World in Central Florida, and major markets in Texas, Northern California, and NYC bracing for business interruptions.

Though developers are used to risk, be they labor shortages and tariffs or rising material costs amid an upcoming Presidential election, the sheer scope of the coronavirus outbreak only contributes to construction industry concerns.

Here are a few ways the coronavirus pandemic is impacting construction:

1. Worker Health & Safety: COVID-19, first and foremost, is a health crisis, and employers must prioritize worker well-being and compliance with health and safety standards. In early March, OSHA issued an alert and interim guidance about managing coronavirus risks in the workplace, and although construction is not a high-risk industry for the virus in the same way as health care, employee safety and work force productivity remain significant concerns.
2. Material Delays: Containment efforts abroad have slowed supply chains, posing threats of higher costs and delayed project completions for commercial builders that rely on foreign-made goods or materials.
3. Client and Lender Confidence Loss: COVID-19’s impact on client and lender confidence could mean restrained financing until uncertainty passes. Despite low interest rates, financing pullback, increased focus on risk mitigation, and conservative underwriting could contribute to higher prices, delays, and cancellations.
4. Containment Efforts: Containment efforts have had a very real impact on the public, and while construction in many places continues, new public health guidance or local ordinances could change that. Apart from hoping construction will be exempt from any shelter-in-place order or closures, contractors may need to rely on technology and remote work for administrative needs, or address other concerns due to substantial disruptions. Still, it remains to be seen what, if any, solutions would arise for continuing projects should worksites be shut down.
5. Contract Disputes & Litigation: While contractors could not have anticipated the pandemic, they may still be contractually responsible for delays, cost overruns, or cancellations. Evaluating a controlling contract will determine what options contractors and owners may have in light of the pandemic. That includes force majeure protection, project extensions, and other forms of risk allocation, as well as potentially opportunistic claims and the need to defend against them.

Guidance for Contractors & Construction Industry Amid COVID-19

Although it may currently be business as usual for some in construction, uncertainty about the duration of the coronavirus pandemic and a looming economic recession have created a petri dish for panic. Chaos aside, the commercial construction industry should be looking long-term and preparing for the virus’ impact, even as forecasts remain unknown, and developments continually unfold.

With far-reaching potential effects on construction– including both the short-term impact on project work force and offsite impacts that present a broader scope of issues involving labor shortages, production, and supplies – contractors should now be assessing their options, and taking calculated steps to manage risk and loss.

Here are few places to start:

• Contract Review: Review contracts for clauses that address rights and processes in the event of unforeseen circumstances, non-performance, and delays. This includes determining whether contracts contain force majeure clauses that provide relief, whether COVID-19 constitutes a force majeure event as defined by the contract’s unique terms, and other options that may exist to excuse non-performance, extend projects, account for cost overruns, allocate risk, and address losses and damages. It is also important to assess both prime and subcontracts, and work carefully when contracts address relevant matters differently. Even when contracts don’t specifically provide for relief in the event of pandemics, there may exist common law claims to excuse non-performance when circumstances are sufficiently disruptive and uncontrollable. Because such claims are highly complex, working with experienced counsel is important.
• Clear & Compliant Notice: Identify express notice provisions for claiming delays and additional costs, including the time period in which proper notice must be provided, to whom notice must be provided, and method of delivery. Some contracts contain clauses which may expose contractors to forfeiture of rights to adjustments if timely notice is not given. Although contractual terms may vary, it’s important to create a written record of notice compliance.
• Suspension & Termination Clauses: Give special focus to contractual provisions providing owners with the right to suspend a project, as well as rights for time extensions and additional compensation if projects are re-started or change orders required. These provisions may also give contractors the right to terminate an agreement and receive pre-determined compensation if suspension persists beyond a stated amount of time. Owners and contractors should be vigilant of actions that could be characterized as a suspension, even if they are not referred to explicitly as such.
• Document Delays and Disruptions: Keep record of any effects COVID-19 has on a project. When doing so, keep in mind that delay and disruption recoveries require contractors to (a) establish the right to time extension and cost adjustment, and (b) establish the extent and duration of the delay, and the added cost. Be specific in record-keeping, documentation, and updates to schedules, time sheets, and costs, identifying which are related to COVID-19 and why. CPM scheduling, if used, should be evaluated and assesses for its use in supporting a delay claim.
• Evaluate Insurance: Given the potential for loss, contractors should additionally evaluate existing insurance policies to determine whether they may provide coverage for losses arising from COVID-19. Like project contracts, language and terms in policies can vary. Proof of actual loss and documentation can support insurance claims, and experienced attorneys can help explore available coverage, specialized policies involving trade disruption or supply chain risk insurance, and insurance disputes that may arise.
• Identify Potential Challenges Early: Managing risk means taking a proactive approach. This means taking action to fulfill any obligation for taking reasonable steps in mitigating delay or disruption, and maintaining clear record of those efforts. Depending on the contract and project, contractors may establish lines of communication with vendors and subcontractors to assess labor and supply issues, contingency plans and protocols, and alternatives (i.e. substituted materials, temporary labor, etc.). In some circumstances, COVID-19 may offer fewer options for alternative solutions, but identifying potential challenges and making reasonable effort to mitigate can fulfill a contractor’s legal responsibility.
• Re-Evaluate Future Contracts: Contracts soon to be executed can present a host of issues to all involved parties. However, because there may be issues with arguing that future conditions should have been foreseen at the time a contract was signed, a careful consideration of delay and disruption risks and language used in contracts is important. Parties in any future contract would benefit from reaching mutually agreeable terms about potential project impacts in light of COVID-19 and its future repercussions.

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Many of these strategies are best practices when it comes to mitigating risk in commercial construction, but in light of COVID-19 and a deeply uncertain future, owners and contractors need to exercise an abundance of caution and proactive care when it comes to managing dealing with coronavirus fallout, delays, and potential future losses or litigation.

At Hendershot Cowart P.C., our Houston-based attorneys have decades of collective experience guiding clients through a range of matters concerning construction law, contracts, insurance, and commercial litigation. Though this is a unique and novel time, we have the insight to effectively counsel clients immersed in complex construction projects and contractual relationships about their rights and options for managing risks, and weathering what may come. Contact us to speak with an attorney.