With the exponential spread of COVID-19, owners, contractors, and design professionals are recognizing the substantial impact this pandemic will have on the construction industry. Several states issued shelter-in-place orders, resulting in the suspension of some construction work. In some states, this has resulted in work stoppages on some of our nation’s largest infrastructure projects. The financial impact of these work stoppages will be significant. As a result, parties to construction agreements have looked to their force majeure clauses for guidance on how these issues should be addressed.
Although the scope of this pandemic is still unclear, there is already a large body of written work addressing the contours of force majeure clauses in commercial and government construction contracts. As many of these articles note, the Federal Acquisition Regulations (FAR) as well as numerous form construction contracts contain provisions that address how the impacts and delays from the coronavirus will be handled. While not all construction or design agreements contain force majeure clauses that cover the coronavirus pandemic, many do. The question for those whose contract include such clauses is: now what do I do? The answer: carefully review your agreements and understand the actions you must take now to avoid significant economic loss.
Commercial construction projects
Owners, contractors, and design professionals whose projects are impacted and delayed as a result of the coronavirus need to carefully read and fully understand the force majeure provision in their contracts. The inquiry, however, does not end there. Clauses addressing the possible relief afforded to a party due to impacts and delays from the coronavirus will be scattered throughout a contract, including, as noted below, in provisions addressing escalation, termination, and claims. Understanding each of these provisions, and the interplay between them, will be vital to managing risks and preserving rights.
With the exception of form contracts, every contract contains unique clauses that will directly bear on your rights. Many of these provisions contain strict notice requirements dictating how long you have to notify an upstream contractor or owner about the possible impact or delay. In addition, many require the contractor or design professional to provide the upstream contractor or owner with a detailed schedule analysis or description of the impact or delay. Understanding these requirements, and ensuring strict compliance, is the first step in protecting yourself against the likely disruptions that will result from the coronavirus. This is vitally important, as many contracts provide that the failure to provide timely notice of such a claim results in a waiver. In some states, such a waiver is enforceable.
As with bespoke contracts, form contracts contain notice provisions that must be followed. For example, A201-2017 provides the following:
§ 8.3 Delays and Extensions of Time
§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 22.214.171.124, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
§ 8.3.2Claims relating to time shall be made in accordance with applicable provisions of Article 15.
§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.
As set forth in Section 8.3.2 of the A201-2017, a party who is delayed as a result of one of the acts set forth in Section 8.3.1 (a claim arising from impacts and delays due to coronavirus would arguably fall within the scope of Section 8.3.1(3) & (5)) must comply with the notice requirements set forth in Article 15, which states:
§ 15.1.3 Notice of Claims § 126.96.36.199 Claims by either the Owner or Contractor, where the condition giving rise to the Claim is first discovered prior to expiration of the period for correction of the Work set forth in Section 12.2.2, shall be initiated by notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party under this Section 188.8.131.52 shall be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.
As stated in the highlighted text, a claim for any impact or delay resulting from the coronavirus must be made in writing within 21 days that the impact is known. While the full impact of the coronavirus on many projects is still unknown, the safest course for any party making a claim as a result of this pandemic is to provide notice as soon as it is clear there will be an impact. As noted above, failure to provide timely notice in some states, particularly when contracting with a state or local government, may result in a waiver of the claim.
Once notice has been prepared and provided to the other party, it is important to commence trying to quantify the scope of the impact and delay. Upstream owners and contractors will want to see detailed schedule analyses that attempt to predict the impact and delay to the substantial and final completion milestones for the project. Likewise, if your contract provides a right to recover costs for force majeure, which many do not, it will be important to understand the magnitude of the financial consequences of the impacts and delays to the project. Maintaining open communication with the other party to your agreement and providing periodic updates relating to the likely costs and schedule impacts from the coronavirus will assist both parties in making the right decisions for how to proceed.
Contractors who are impacted by the coronavirus, whether through work stoppages or labor or material shortages, should also review their contracts for other provisions that may provide relief. Clauses that provide contractors with the ability to escalate material or labor costs will help to offset increased costs resulting from impacts to the global supply chain. Like the delay provisions discussed above, these clauses typically include notice requirements that the claimant must satisfy before it can escalate its costs.
Finally, in the event that delays and financial impacts become too long or costly, parties may look to the suspension or termination provisions in their contracts to find ways to mitigate the financial impact of the coronavirus pandemic. Some contracts provide parties with the ability to terminate the contract when work is stopped for a significant period of time. In addition, suspension and termination for convenience provisions may provide owners the ability to temporarily suspend a project with less financial risk than simply allowing impacts and delays to accumulate. Termination provisions should not be used lightly, and in any event, contractors and owners should begin a dialog as soon as possible about how to effectively deal with the impacts from this pandemic.
For entities contracting with the federal government, the requirements are not entirely dissimilar. As in commercial contracts, it is imperative that government contractors communicate with contracting officers and provide timely notice of impacts and delays. The FAR provides strict timeframes for requests for equitable adjustments relating to government-directed work stoppages, and failure to satisfy those time requirements may bar your right to recovery. Even where the contracting officer fails or refuses to issue an order bearing on the contractor’s performance obligations under the contract, a contractor may still be entitled to an equitable adjustment, provided that the notice requirements were satisfied.
Understanding your obligations under the FAR and the terms of your contract with the government will prevent inadvertent waiver of your rights. It is important that you maintain ongoing communication with the contracting officer, document the government’s actions or inactions, and timely submit all requests for an equitable adjustment.