Michael Henry and Kevin J. Riexinger | Construction Executive
The first quarter of 2022 provided a valuable glimpse into some of the major issues the construction industry can expect to continue impacting jobsites for the rest of the year.
Early in the pandemic, construction was not immune from the shut-downs that swept across market sectors. Workers were staying home to shield themselves and their families from the COVID-19 virus (and variants). This caused delays with construction projects and failures to meet negotiated benchmarks or deadlines. Contractors were left to wonder whether they remained obligated to perform under their contracts, or whether COVID-19 allowed them to invoke force majeure clauses. Over the past two years, there has been much debate about whether force majeure clauses encompass COVID-19 risks.
Traditionally, force majeure is only invoked for significant weather events or natural disasters. Unsurprisingly, outcomes of legal actions regarding COVID-19 and force majeure varied by state and by contract. It didn’t take long for contractors to seek a more predictable and certain solution.
Rather than hoping for a court to agree that the pandemic triggered a force majeure clause, construction contractors began including clauses specifically addressing COVID-19. This protective measure has become increasingly widely used and will likely be close to universal by the end of this year. The objective is to clearly and unambiguously demonstrate that the virus was contemplated by both parties to a construction contract—thus eliminating the guesswork involved with trying to fit the pandemic under the umbrella of other clauses. The desired outcome is, of course, to shield contractors and subcontractors alike from breaches caused by pandemic-related unforeseen costs, delays and other performance impediments. This trend often results in these new clauses being added as subsections to paragraph(s) dealing with “delays and extensions.” Although specific language varies, the intent is to show a court, mediator or arbitrator that COVID-19 was specifically contemplated and that its potential impact on a construction site should not be borne by the contractor.
With these new COVID-19 clauses in the mix, the (next) billion-dollar question becomes: Where do those protections end and the next supply-chain crisis begin? The pandemic is an easy target to pin blame on all supply-chain-related issues, but it is not the only culprit. It is undeniable that the pandemic has played a role in manufacturing and assembly delays while also limiting access to ports and shipping personnel. However, unrelated crises and unforeseen events from across the globe have also negatively impacted supply chains. From the Suez Canal incident to lithium shortages to the war in Ukraine, supply-chain problems unrelated to COVID-19 have also been pervasive of late. Any issue with supply naturally impacts construction.
Unfortunately, some key industries in the construction market have confusing, web-like supply chains. In such instances, the determination of the reason for the delay alone can be time-consuming. When a small component made in a far-off corner of the world is preventing a domestic construction project from moving forward on schedule, the construction manager must quickly figure out the cause of the delay and if an adequate replacement component exists.
Similar to the new COVID-19 clauses, construction contractors are now experimenting with contract language that protects against other supply-chain issues. As of March 2022, the most immediate threat facing the supply chain are crippling gas prices. This issue has permeated every industry and household. If shipping materials from “A to B” doubles in cost, shippers don’t simply eat the expense. Rather, increased transit costs are mostly pushed on to the consumer. This can be incredibly problematic for construction projects. Bids and proposals—based largely on costs of materials—have already been submitted and accepted. If the costs of materials suddenly increase because the expense to ship has shot up, contractors are left to consider if working on thinner margins makes sense for their company. In some instances, the spike in materials prices could totally erode a contractor’s “built-in” profit, at which point it is left in the precarious position of working at a loss, walking off the job or, in the most dire instances, going out of business.
All of the above challenges on today’s construction sites are setting the stage for litigation with new wrinkles not ordinarily seen by counsel. As contract language evolves, construction attorneys must remain dynamic in handling of claims, especially those with time-enacted damages. As construction counsel review their clients’ contracts (design professionals and laborers alike), bear in mind the importance of having a candid dialogue regarding the client’s risk appetite.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.