Publication

March 26, 2020Client Alert

Michael Best COVID-19 Contractor Toolbox

This Michael Best COVID-19 Contractor’s Toolbox is a quick reference guide intended to help shape your company’s response to the unprecedented challenges created by COVID-19, which is creating uncertainty on construction sites, cost increases, and delays. The response from state and local governments has created a patchwork of “safer-at-home,” “stay-at-home,” and “shelter-in-place” orders, which in some areas have completely halted work on construction projects. The recommended action items below are important considerations for your business and are intended to be suggestions to help you decide the proper course of action related to these novel construction issues. Professional and legal advice may be necessary depending on your situation. This guide is not a substitute for consultation with an attorney.

Potential COVID-19 Related Impact

Recommended Action Items from Toolbox (See Below)

Anticipated Delay or Increased Costs – Contractor reasonably believes it will be unable to meet a contractual deadline or that it will incur labor or material costs in excess of the contract amount.

  1, 2

Actual Delay of Contractor’s Performance – Contractor falls behind project work schedule due to labor shortages or excessive material lead times.

  3, 4, 5

Actual Cost Increase – Contractor’s costs exceed original contract amount because 1) Contractor is forced to hire additional labor to supplement sick/quarantined labor force; or 2) due to supply chain interruption, material scarcity, or more expensive replacement parts.

  3, 4, 5

Claim/lawsuit for Contractor Default – Upstream claim from Owner (or General Contractor against Subcontractor) for contract default for late performance, cost increase claims, or related claims.

  3, 6

Employee Concerns/Sickness – How to deal with an employee infected by, or suspected of being infected by, COVID-19 and related workforce concerns.

  8, 9

Project Suspended due to Government-imposed Restrictions or Owner Decision – Owner and Contractor unable to continue work on project due government-imposed work stoppage or decision by owner to suspend.

  3, 5, 6, 9

Loss of Income – Contractor experiences loss of income due to government-imposed project stoppage, project suspension, or termination.

  9

Future Projects – The COVID-19 crisis will create an opportunity to learn from this novel risk and how the implications will affect future contracts, insurance coverage, and client relationships. Contractors should consider evaluating/upgrading given these new experiences.

  11


“Contractor’s Toolbox” - Action Item Table of Contents

1.  Review ongoing projects and assess Contractor’s ability to complete on time and within contractual terms.

2.  Contractor should consider sending a Preliminary Impact Statement to the Owner and higher tier contractors.

3.  Review contract for terms applicable to addressing COVID-19 impacts and remedies.

4.  Provide contractual notice for impacts related to costs and delay.

5.  Evaluate contractual and common law remedies/defenses to claims with legal counsel.

6.  Create claims documentation for any impacts, including use of forensic accountant and lawyer to capture all cost categories.

7.  Take proactive steps related to COVID-19 workplace safety and evaluate employer/employee legal rights with legal counsel.

8.  Develop and business/insurance recovery plan.

9.  Strategic communication – government relations and project financial stability.

10. Future planning – make necessary contract, insurance, and relationship revisions


1.  Review ongoing projects and assess Contractor’s ability to complete on time and within contractual terms.

Contractors should take inventory of all ongoing projects and make a realistic assessment of likelihood of completing the job on time and within budget given COVID-19 risks.

Key Considerations:

  • Whether the project is located in a COVID-19 “outbreak” area, which are those areas with the highest density of community spread confirmed COVID-19 cases and may impact availability of workforce.
  • Are project materials readily available, and are increased lead times anticipated?
  • Has the state or local government instituted a “safer-at-home,” “stay-at-home,” or “shelter-in-place” order? If so, will the Contractor’s project be considered to be exempt or for an “essential business” purpose?
  • Have building departments in the project area closed, and will those closures affect the Contractor’s ability to obtain permits or inspections?

2.  Contractor should consider sending a Preliminary Impact Statement to the Owner and higher tier contractors.

A Preliminary Impact Statement is a notice that informs the recipient that the Contractor anticipates difficulties completing performance within the terms of the contract. Delays caused by a sick/quarantined workforce or excessive cost overruns related to material sourcing issues are the likely concerns related to COVID-19. The intent behind providing the upstream contractor or the Owner with this preliminary notice is to initiate a collaborative process where the Contractor and the upstream party can jointly develop a plan to continue the project. Additionally, early preliminary notice of project impacts helps prevent subsequent disputes and defenses related to surprise cost overruns or delays.

Generally, a Contractor’s Preliminary Notice should include:

  1. A statement describing the cause of the Contractor’s anticipated performance difficulties. Here, “COVID-19 pandemic” is likely sufficient;
  2. An explanation of how the Contractor’s performance will be negatively affected; and
  3. An invitation to start developing a plan aimed towards project completion.

3.  Review contract for terms applicable to addressing COVID-19 impacts and remedies.

The impacts of COVID-19 on the construction industry, and businesses generally, are proving to be severe and long-lasting. Disruptions in multiple areas are creating construction delays, including jobsites shuttered by government action or executive order; building departments responsible for permitting and inspection are closed; required supplies and materials are scarce due to supply chain interruption; and the labor force is reduced or unavailable due to social distancing requirements, sickness, or quarantine. Contractors are typically obligated to perform their contractual obligations in a timely manner or face the possibility of being assessed damages for delay. Even worse, an owner might suspend a project or the Contractor might be terminated from a project, rendering the Contractor’s ability to recover from a delay doubtful. The sudden onset of the COVID-19 pandemic, and the resultant disruptions caused on jobsites, were surely unforeseeable to contractors starting projects even just a few months ago. A careful review of contract provisions is required to determine which potentially provide a Contractor relief from delays or price increases resulting from COVID-19.

Construction contracts should be reviewed for the following provisions:

  1. Force Majeure – Commonly included in construction contracts, Force Majeure provisions typically allow for nonperformance or “excusable delay” when a disruptive event beyond the control of a party prevents that party’s performance. Typical examples of Force Majeure events include fire, flood, earthquake, war, political unrest, etc. For instance, the American Institute of Architects (“AIA”) General Conditions, form A201-2017, provides for excusable delay in the event of “unusual delay in deliveries” and “other causes beyond the Contractor’s control.” See AIA A201-2007, § 8.3.1. A similar provision is found in ConsensusDocs200 allows for an extension to time to perform for “any cause beyond the control of the Constructor.” See ConsensusDocs200, § 6.3.1. These kinds of provisions will generally provide relief to a Contractor that is delayed due to unforeseeable events like COVID-19.

Key Considerations

  • Pay close attention to events listed under the Force Majeure provision and whether they apply to Contractor’s current situation. Enumerated Force Majeure events are easier to invoke than Force Majeure “catch-all” provisions, which require the Contractor to prove that an event was not foreseeable at the time of contracting.
  • Understand what relief is granted by the Force Majeure provision. Typically, delay is allowed for a defined amount of time, but not indefinitely. Also, there are instances where delay is compensable, but that determination depends on the individual contract language.
  1. Price escalation – Generally, the Contractor is responsible for the cost of labor and materials used on a project. Again, referring to AIA form A201-2017, the Contractor “shall provide and pay for labor, materials, equipment, tools, construction equipment and machinery, ...necessary for proper execution and completion of the Work.” However, COVID-19 has disrupted supply lines and reduced the healthy labor force making it more difficult, and costly, for Contractors to obtain the supplies, materials, and workers they need to complete a project. Unless the contract contains an explicit price escalation provision, which dictates how increased costs will be allocated, costs increases will likely become of point of dispute between Owners and Contractors and Contractors and Subcontractors.
     
  2. Claims – Contracts usually include provisions that mandate that notice of any claims be sent within a certain number of days. For instance, AIA form A201-2017 requires that notice be sent within 21 days after occurrence of the event giving rise to the claim, or within 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later. See AIA A201-2017, § 15.1.2.

4.  Provide contractual notice for impacts related to costs and delay.

Providing contractual notice is an extenuation of the Preliminary Impact Statement described above in #2. The requirements for providing notice of a claim, which includes claims for increased costs and for excusable delay, differ in every contract. Some states strictly enforce the notice requirements mandated by contract, so if Contractor fails to comply, they risk forfeiting a valuable contractual remedy. For reference, AIA A201-2017 § 15 contains slightly different notice requirements for claims for additional time (§ 15.1.6) and for claim of additional costs (§ 15.1.5). As soon as a Contractor begins to realize the disruptive effects of COVID-19, or at least when the impact is imminent, special attention should be given to ensuring compliance with contractual notice requirements.

Key Consideration:

  • Determine which notice requirements apply for delays, changes, increased cost, or other impacts.
  • Provide as much information as possible on how performance is being impacted and why the change or cost increase in necessary. If additional information is learned at a later time, provide an updated notice. We have never seen a contract that limited the number of notices that could be sent related to a claim – so more may be better.

5.  Evaluate contractual and common law remedies/defenses to claims with legal counsel.

In instances where an Owner or Contractor is not satisfied with performance on a project and a dispute arises, generally, a party’s rights, responsibilities, and remedies are defined by the construction contract. However, COVID-19 involves unprecedented challenges, which the contracting parties could not have foreseen at the time of contract formation. Over time, several common law legal defenses have developed which could provide a Contractor relief from nonperformance or delayed performance of their contractual obligations. The concepts below are provided to create additional awareness of the legal landscape should a project not go as planned and should be reviewed in consultation with an attorney.

Supervening Events – an event that occurs after contract formation that is the fault of neither party, and the non-occurrence of which was a basic assumption of the parties’ at the time of contract formation.

Supervening events can excuse performance if they create the following:

Impossibility – A party’s ability to perform becomes objectively impossible.

Impracticability – A subsequent event or discovery materially changes the scope and difficulty of a project.

Frustration of Purpose – A party’s reason for entering into the contract is negated by an event that occurs after contract formation.

Key Considerations:

  • The increased cost of performance is likely not enough to create a supervening event.
  • Monitor closures and postponement as they may create Frustration of Purpose.
  • These doctrines are state specific so application varies.

6.  Create claims documentation for any impacts, including use of forensic accountant and lawyer to capture all cost categories.

 Preserving a detailed record of delays, changes, or cost increases is critical to the claims process and necessary for payment when claims are compensable. It may be wise to seek an outside forensic accountant to help contractors track all the cost categories that should be recorded.

Key Considerations:

  • Keep a detailed daily record of schedule and cost impacts related to COVID-19.
  • Create a separate accounting code for costs related solely to COVID-19.
  • Maintain a communications log with Owner and upstream contractors relevant to delay and costs impacts.

7.  Take Proactive Steps related to COVID-19 Workplace Safety

COVID-19 is now an OSHA reportable illness. Contractors should implement CDC guidelines, as well as abide by any other governmental mandate aimed at controlling the spread of COVID-19. Supervisors should be reminding employees and subcontractors not to come to work if they are experiencing any symptoms of illness. If a supervisor identifies any person on the jobsite who is showing visible signs of illness, the individual should be immediately sent home. Finally, where possible, supervisors should ensure that workers are maintaining six feet of distance between each other and sanitizing equipment after use. These procedures have been shown to limit secondary infection within the workforce. Employers should follow all available CDC and OSHA safety guidelines. For more information on developing OSHA compliant COVID-19 safety protocols, reach out to Workplace Safety & Health team.

Key Considerations:

  • Develop a “toolbox talk” aimed at minimizing the spread of COVID-19.
  • Ensure HR professionals are trained to address the multitude of employment issues related to COVID-19 and resulting medical leave.

The impact of COVID-19 in the employment law context is far reaching and exceeds the scope of this guide. However, Michael Best’s Labor & Employment team has the experience and is well-equipped to address the following concerns and considerations.

  • Family Medical Leave Act (FMLA) and other leave related questions;
  • Guidance on tax credits;
  • Implementation of restrictions on employee travel;
  • Common workplace scenarios and guidance on implementing CDC guidelines;
  • OSHA workplace safety and hygiene guidelines;
  • Employee benefit issues; and
  • Unemployment Insurance and related tax questions.

Click here to learn more about our Michael Best Labor & Employment team.

8.  Develop an insurance recovery plan

The economic fallout of COVID-19 is proving to be dramatic. While many jurisdictions are exempting certain construction projects, Boston for example has shut down virtually all construction. Government imposed “safer-at-home,” “stay-at-home” or “shelter-in-place” orders prohibit some Contractors from accessing jobsites, and in some cases, even prevents a Contractor from keeping its own business open.   This new economic reality has many Contractors searching for relief and a way to replace lost income. A review of all insurance products should be conducted to identify potential coverage for lost business income. The following policies should be reviewed for coverage:

  • Business Interruption Insurance (stand-alone policy or included in property insurance);
  • Commercial General Liability (CGL) Insurance; and
  • Event Cancellation insurance.

Key Considerations

  • Insurance coverage is very technical and will likely require a physical loss to trigger coverage.
  • Some policies include coverage for losses related to government action and/or communicable diseases.
  • After the 2006 SARS outbreak, some polices started to include exclusions for bacterial/viral outbreaks.
  • Legal analysis is suggested for these insurance claims.

9.  Strategic communication – government relations and project financial stability.

In an effort to slow COVID-19, state and local governments are shutting down “nonessential” businesses across the country. An order from local or state authorities needs to be evaluated to determine if any given construction project or activity is subject to the restrictions in the order.    Wisconsin just issued such an order. A separate Client Alert will address this specifically. There is no single consolidated definition of what an “essential business” is. In the construction context, an essential business is likely any contractor working on, at the very least, a healthcare facility, a public infrastructure project, or an affordable housing project. However, we have already noticed varying interpretations at state, county, and local levels, so further analysis is required on an individual basis.

Additionally, Contractors face the risk that owners or upstream contractors may decide, for economic reasons, not to continue a project. We know from the last recession, many projects stalled when the financial woes hit. Contractors need to be prepared for this.

Key Considerations:

  • Actively monitor government imposed business restrictions in your area.
  • Work with state and local officials to obtain certification as an essential business if your project is restricted, but may be eligible for separate request for an exemption.
  • Keep abreast of the key indicators of financial health of project, payments, and completion percentage.

Again, the day-to-day issuance of various state orders has created a rapidly developing situation that requires constant monitoring. Michael Best and Michael Best Strategies are currently providing essential business status consulting and legislative monitoring to ensure clients’ interests are protected throughout the COVID-19 response. Please contact us immediately for more information on obtaining essential business status.

10.  Future planning - make necessary contract, insurance, and relationship revisions.

In light of COVID-19, all current contracting practices should be reviewed for appropriateness and risk mitigation. Given the present reality of COVID-19, existing contracts may have ambiguities that should modified in the present climate. Contracts are not “one size fits all,” and so Contractors should review all templates, as well as pending contracts, as part of this planning effort to avoid COVID-19 pitfalls. Also, contractors should consider their relationships with other parties to see if they are vulnerable to COVID-19-style interruptions.

Key Considerations:

  • Review pending contracts to ensure risks associated with unforeseeable delays, government intervention, and supply and labor shortages are adequately addressed in light of the COVID-19 style impacts.
  • After conducting a review of all currently-held insurance products, develop a strategy to mitigate risks associated with COVID-19-type occurrences through insurance products.
  • Conduct a critical review of your company’s COVID-19 response and formalize policy and procedures specific to future outbreaks.
  • Review insurance products for policies and language that might provide coverage in light of COVID-19 risks.
  • Review relationships for customers, subcontractors, or suppliers that may be less vulnerable to COVID-19 risks.

Please keep abreast of the unique challenges facing the construction industry in today’s COVID-19 environment by visiting the Michael Best COVID-19 Resource Center for the latest updates on business and legal implications related to the coronavirus.

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