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Know Your Rights: Potential Impacts of COVID-19 on Construction Projects

The COVID-19 (Coronavirus disease) outbreak, and the resulting emergency declarations and quarantines in various cities and countries has the potential to negatively impact construction projects.  The extent of the potential impacts on construction projects is unknown, but forward-looking contractors are already planning for possible labor shortages, material delays or unavailability, disruption to supply chains, and other impacts.  Although contractors’ positions will be dependent on specific contract clauses, it is critical that contractors understand their options in the face of the rapidly changing landscape.  In many instances, the critical analysis starts with the “force majeure” clause.

Sample Force Majeure Clauses

Federal Acquisition Regulation Section 52.249-14 provides a model force majeure provision for government contractors:

(a) Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor. Default includes failure to make progress in the work so as to endanger performance.

(c) Upon request of the Contractor, the Contracting Officer shall ascertain the facts and extent of the failure. If the Contracting Officer determines that any failure to perform results from one or more of the causes above, the delivery schedule shall be revised, subject to the rights of the government under the termination clause of this contract.

(emphasis added).

The Associated General Contractors’ (“AGC”) Consensus Docs 200, also provides a model force majeure provision:

§6.3 Delays and Extensions of Time

§ 6.3.1 If the Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of the Constructor, the Constructor shall be entitled to an equitable extension of the Contract Time. Examples of causes beyond the control of the Constructor include, but are not limited to, the following: (a) acts or omissions of the owner, the Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by the owner, or arising from decisions of the owner that impact the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by the owner pending dispute resolution or suspension by the owner under section 11.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving the Constructor; (g) general labor disputes impacting the project but not specifically related to the Worksite; (h) fire; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. The Constructor shall submit any requests for equitable extensions of Contract Time in accordance with ARTICLE 8.

§ 6.3.2 In addition, if the Constructor incurs additional costs as a result of a delay that is caused by items (a) through (d) immediately above, the Constructor shall be entitled to an equitable adjustment in the Contract Price subject to section 6.6.

(emphasis added).

Force Majeure Claim Requirements

Most force majeure clauses allow the contractor to claim a time extension.  Far fewer allow the contractor to recover costs associated with a successful force majeure claim.  Generally, for a successful force majeure claim, the contractor must establish:

  1. The force majeure event is beyond the control of the contractor;
  2. The event impacts contractual performance or makes the performing under the contract more problematic or expensive;
  3. The contractor was not at fault or negligent;
  4. The contractor acted diligently to try and mitigate the impact of the force majeure event; and
  5. The contractor must provide required notice to the owner.

Although contract dependent, a diligent contractor should be able to sustain a successful force majeure claim in the current Coronavirus-impacted commercial environment.  Under requirement number one, the Coronavirus would likely be considered a force majeure event under both sample provisions above.  The global Coronavirus outbreak clearly falls outside a contractor’s control. 

The continuing quarantines and public health warnings have caused individuals to take drastic measures to avoid contact with the virus, including not going to work.  The lack of jobsite staff as a result of the Coronavirus may be enough to demonstrate a negative impact on contractual performance.  Additionally, the absence or delay of material delivery may also be sufficient to show adverse effects on contractual performance, satisfying the second requirement.  According to Section 6.3(e), Delays and Extensions of Time, above, and in addition to Section 6.3(j), the delay of material shipments as a result of the Coronavirus may also be sufficient to meet the second requirement to sustain the force majeure claim.

Contractors would be well-advised to implement measures to track impacts at the first sign of Coronavirus.  Assessing delays from workforce shortages can be challenging, requiring clear documentation and convincing schedule analysis.  Proving the actual impacts may present the greatest challenge to claim recovery.

Owners are likely to attack force majeure claims on the grounds that the Contractor did not act reasonably in trying to stop or limit the impact of the Coronavirus on the project.  To meet requirements three and four above, contractors must take precautions and follow recommendations of the United States government and the CDC.  The CDC provided a comprehensive guide to planning, preparing, and responding to the Coronavirus outbreak, available here.  Contracts must ensure that they are taking the necessary steps to minimize risk to employees, material shipments, and clients.  In addition, evidence of contingency plans for labor or material shortages will be useful for establishing one’s mitigation efforts.

Contractors should be providing notice at the first sign that a force majeure event is negatively impacting the project.  Without proper, contractually-mandated, notice to the owner, the contractor may waive its force majeure claim and be held to the contract, without any extension of time, and possible financing, to complete the project.  For example, under AIA Consensus Docs A200 2011, Section 6.3.1, “[t]he Constructor shall submit any requests for equitable extensions of Contract Time in accordance with ARTICLE 8.”  As there is no downside to submitting notice, a prophylactic notice of potential Coronavirus delays on any potentially affected projects is prudent.

Compensable Claims

While a force majeure event will result in a time extension, it is typically non-compensable.  Given the potential for extensive financial impact from delays and disruptions attributable to COVID-19, contractors must try to structure arguments for compensable delay.  To the extent the contractor can point to specific edicts or orders from the Owner / Government that resulted in extra costs, those could be framed as new contract requirements entitling the contractor to a compensable change.  In this context, contractors working on state or federal contracts may be at an advantage because the contracting party is issuing the order.  The difficulty lies in connecting the costs incurred to the specific edict or order.  Contractors would be well-advised to set up cost codes, along with the schedule tracking discussed above, that can attempt to isolate costs incurred as a result of the COVID-19 work disruptions.

Conclusion

As COVID-19 continues to spread in the US and abroad, contractors should reference their respective contracts to understand their respective rights.  If a project is negatively impacted as a result of the outbreak, the contractor may be entitled to an extension of time, an extension in time and an increase in dollars associated with the increase in time, or nothing at all.  To maximize project efficiency and profit, contractors should review their contracts and form a plan to deal with possible impacts of the global spread of COVID-19.

For more information, contact:

John Marshall Cook
Member
jcook@smithpachter.com 

Max Terhar
Associate
mterhar@smithpachter.com 

 

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