Frederick E. Hedberg | Construction Executive
The global COVID-19 pandemic has changed the world forever, disrupting many industries, as well as creating unprecedented challenges that threaten many businesses. The construction industry is no different. Projects throughout the country have been adversely affected by unplanned work stoppages, delays, disruptions to the supply chain, price escalations and other unanticipated events.
It is critical that owners, developers, contractors and suppliers learn from their experiences over the past year and account for the COVID-19 pandemic when drafting and negotiating contracts for their projects.
First and foremost, parties should clearly define their rights and responsibilities to properly manage risks due to COVID-19 and its impacts. COVID-19 and other key related terms should be defined, relying on the CDC and state governments for guidance, to eliminate any uncertainties. The contract should also identify executive orders, guidelines and regulations that have been issued concerning COVID-19 by states, municipalities and other authorities that have jurisdiction where the project is located.
The parties should define whether impacts concerning COVID-19 or COVID-19 ordinances give rise to a claim under the contract and, if so, whether the contractor is entitled to compensation for additional costs and time, to an extension of time only, or neither.
When the construction industry began to feel COVID-19’s effects earlier this year, parties considered whether their contracts contained a force majeure-type provision, and whether COVID-19 constituted a force majeure event. Such a provision excuses a party from performance of the contract as a result of its inability to perform arising directly from an event outside the control of either party, and which was unforeseeable at the time the parties entered into the contract.
In determining whether such a provision is applicable, parties should consider:
- the specific language of such a provision (e.g., does it include epidemic or pandemic, public health or other state of emergency);
- the foreseeability of the event;
- the direct correlation between the event and its impact on performance; and
- the frustration of performance due to the significance of the event.
The intent of a force majeure provision is that neither party should be responsible for additional costs of conditions deemed beyond the control of the parties. Standard contractual provisions, such as section 8.3.1 of AIA 201-2017, section 6.3 of ConsensusDocs 200-2019, and section 52.249-14 of Federal Acquisition Regulation for federal contracts, contain delay clauses that provide for excusable, non-compensable extensions of time. Notably, the AIA does not specifically address pandemics; ConsensusDocs states that epidemics and quarantines are excusable delays.
Now that COVID-19 is known, and government officials, industry organizations and regulatory bodies have issued guidance and protocols, contracts should contain force majeure provisions that include COVID-19 as such an event and allow contractor recovery for unplanned work stoppages, delays, supply chain disruptions, price escalations and other specific unanticipated events.
Otherwise, contractors must include these unknown impacts in their contract price and schedules—resulting in increased costs and less reliable schedules—or account for them by using allowances and stating assumptions and clarifications upon which the price and schedule are based.
Other important provisions to consider when negotiating construction contracts include change in law, suspension and termination, and health and safety. Parties should consider whether change-in-law definitions are sufficiently broad to capture COVID-19-related guidance and protocols. For instance, section 3.21.1 of ConsensusDocs 200-2019 allows for equitable adjustments to contract price and time for changes in the law after the date of the contract; whereas, section 3.6 of AIA A201-2017 limits a contractor’s recovery.
COVID-19 caused parties to suspend work, and even terminate contracts. Consequently, owners must ensure contracts allow them to suspend work for convenience due to COVID-19 health concerns, even if COVID-19 orders allow the contractor to proceed. Parties now must consider termination clauses in light of COVID-19.
The standard ConsensusDocs clause allows for termination after 30 days of work stoppage and for reasons beyond the owner’s suspension (such as court or other government orders or because materials are unavailable through no fault of the contractor). The standard AIA clause, however, does not allow for termination unless repeated owner suspensions of the work constitute in the aggregate more than 100% of the total number of delays scheduled for completion, or 120 or more days in any 365-day period, whichever is less.
Parties should also consider jobsite safety and health compliance in their contracts. In addition to satisfying obligations under OSHA’s General Duty Clause (section 5(a)(1) of the Occupational Safety and Health Act of 1970, 29 USC 654(a)(1), contractors must now follow recommendations and practices of the CDC and HHS, along with adopting and implementing safety regulations issued by governmental agencies affecting site access and operations such as mandatory reporting requirements, jobsite screening, sanitizing and cleansing guidelines, employee training and contact tracing. Parties should define these duties, and contractors should account for additional costs necessary for compliance.
Because the construction industry is an essential business, parties should carefully negotiate key contractual provisions to properly manage their risks due to COVID-19, and to lessen the potential of future delays and disputes that could have detrimental effects on their projects and their businesses.