David A. Blake and Michael E. Wagner, Jr. | Seyfarth Shaw
The 2019 novel coronavirus and the disease it causes (“COVID-19”) is changing the landscape of construction projects across the country. COVID-19 orders from governors and other public officials are impacting projects by requiring new health initiatives, such as social distancing and the use of personal protective equipment, requiring residents to stay at home and self-quarantine if they cross state lines, and in some regions shutting down projects completely. The pandemic is squeezing supply chains, creating the possibility of late deliveries and price escalation as buyers compete for diminishing resources. As the economy hibernates while individuals shelter in place, funding sources for construction financing are diminishing, posing risks to new and ongoing projects. These issues create risks of delay, labor inefficiency, price escalation, nonpayment, and construction workers and on-site owner personnel becoming sick, among others. This COVID-19 Playbook discusses rights, remedies and steps to consider under AIA® Document A201″ – 2017 (“A201”) so you can put yourself in the best position to shape the outcome you need in light of the pandemic.
Pertinent A201 Sections
Section 2.2: Proof of Financing
- Clause1
§ 2.2.1 Prior to commencement of the Work and upon written request by the Contractor, the Owner shall furnish … reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations …
§ 2.2.2 Following commencement of the Work … the Owner shall furnish … reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations … if … (2) the Contractor identifies in writing a reasonable concern … If the Owner fails to provide such evidence … Contractor may … stop the Work … the Contract Time shall be extended appropriately and the Contract Sum shall be increased …
- Commentary and Practice Pointers
Contractors are entitled to obtain from owners proof of financing before commencing construction. Additionally, if the contractor has reasonable concerns during the course of construction, it can require the owner to provide proof of financing for its remaining financial obligations. For this and other reasons, owners should confirm financing before executing the contract. Construction lending could evaporate due to COVID-19.
Owners should also consider measuring commencement from a notice to proceed instead of the date of the contract. That way, if financing is delayed, the owner can postpone issuing the notice to proceed and protect the pricing agreed to in the contract. In that regard, contractors may want to include an outside date for the notice to proceed due to pricing, which with the passage of time could escalate due to supply chain disruptions due to COVID-19.
Similarly, for new contracts, the parties may want to consider a guaranteed maximum price with a contingency instead of a lump sum pricing model. While owners may be tempted to lock contractors into a lump sum, doing so in this environment may not be to their advantage because those contracts could include significant dollars for pandemic risks that may not materialize.
Lending concerns due to COVID-19 may provide grounds for contractors to request evidence of financing during the course of performance. Failure to provide that evidence could support work stoppages, time extensions and additional compensation. Owners should expect these requests and be prepared to respond.1
Section 3.7.2: Compliance with Laws and Orders
- Clause
§ 3.7.2 The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities applicable to performance of the Work.
- Commentary and Practice Pointers
This Section obligates the Contractor to comply with lawful orders of public authorities applicable to the performance of the work. That includes governmental health orders pertaining to COVID-19, such as those requiring social distancing. Owners might assert no-additional compensation is owed for inefficiencies and other costs associated with complying with those orders because doing so is a contract requirement. On the other hand, language is sometimes added to the general conditions allowing the contractor to recover additional time and compensation for complying with new laws or orders that are enacted after the contract is executed. Contractors might find relief in that type of provision.
Section 3.8.2: Allowances
- Clause
§ 3.8.2 Unless otherwise provided in the Contract Documents,
- whenever costs are more than or less than allowances, the Contract Sum shall be adjusted accordingly by Change Order. The amount of the Change Order shall reflect (1) the difference between actual costs and the allowances under Section 3.8.2.1 and (2) changes in Contractor’s costs under Section 3.8.2.2.
- Commentary and Practice Pointers
Allowances are open check books. Generally speaking, if an allowance item costs more than the allowance amount included in the contract sum, the owner needs to pay the contractor the difference. Given the potential for price escalation due to COVID-19, allowances are particularly risky for owners, as the actual price may be significantly more than anyone expected when the allowance amounts were set. Owners may want to have a discussion with their contractors to see if open allowances can be bought out quickly before prices escalate, and avoid or minimize allowances in new contracts for items that seem prone to price escalation due to COVID-19.
Section 3.18.1: Indemnification
- Clause
§ 3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants … from and against claims, damages, losses … provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death … but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them …
- Commentary and Practice Pointers
The contractor is required to indemnify the owner for sickness, disease and death caused by the negligence of the contractor or its subcontractors. If an employee of the contractor or subcontractor has COVID-19, comes to the site and infects the owner’s employees, this indemnity clause may be triggered. The owner needs to establish the contractor acted negligently. Allowing a worker on site that is known, or perhaps even reasonably suspected, to be infected with COVID-19 could constitute negligence on the part of the contractor or a subcontractor. Negligence might also be established if the workers are not abiding by social distancing guidelines, not using personal protective equipment, or otherwise not following applicable state or local health orders.
This type of issue may be more prevalent on tenant improvement and rehabilitation work where there is the likelihood of increased interaction between the owner and construction workforce.
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Footnote
1. For all clauses, bold and underlining was added by the authors. Clauses have been abbreviated to focus on key points addressed in this Playbook.