The COVID-19 Pandemic created a global disruption across trade, finance, health, education, businesses, and society in general like few others in the past 100 years. The pandemic’s fallout is being felt in the supply chain interruption experienced across all construction projects. This vulnerability, especially to an industry that has high dependence on China to fulfill its need for raw materials or finished products, has been exposed. China’s dominant role as the “world factory” means that any disruption to China puts global supply chains at risk. The impact to construction has manifested itself in rising prices of steel, other metals, PVC products, lumber, and a variety of other essential construction materials. The impact to the supply chain has shocked the construction industry and likely future measures will address the overdependence on foreign markets for construction supplies. News accounts are filled with COVID-19 mutations and virus strains that threaten further disruptions to the construction industry. Simply put, the pandemic is not over yet.
In light of these uncertainties, contractors should look to their agreements to equitably assign the risk of the pandemic’s future effects on supply chains as well as productivity losses that may occur as a result of new government shutdowns, work rule edicts, transportation impacts, and other consequences of the pandemic. Here are various contract clauses that can provide a starting point for negotiation of how the risk of the pandemic’s effects may be assigned on construction projects.
1. Private Projects. In private industry, where contractors have an opportunity to negotiate construction provisions, the give and take of negotiation determines where the ultimate risk for COVID impacts should fall.
- Change in Law: A broad “change in law” clause generally provides good protection should the pandemic worsen:
If, after the date of the Parties’ execution of the Contract, (i) a change in any applicable law or any interpretation or application thereof, or (ii) a change in or issuance of any applicable permit delays Contractor’s performance of the work, increases Contractor’s cost to perform the work, or otherwise adversely affects contractor’s rights, obligations, or its ability to perform under the Contract, then Owner and Contractor agree to amend the Contract to extend Contractor’s time for performance of the work, to adjust Contractor’s compensation to account for any increased costs of performance, and to equitably adjust the Contract terms and conditions as necessary to overcome the adverse effect(s) of such change in applicable law or change in or issuance of any applicable permit on Contractor’s rights or obligations.
The effect of this clause is to “baseline” the COVID costs to the date the contract is executed. If, after the contract is executed, the contractor is forced to incur extra costs due to the impact of COVID or other government regulations, those costs are compensable.
- Constructive Acceleration:
As discussed in a prior blog article, acceleration occurs when the contractors entitled to a time extension requests a time extension but is not granted that time extension by the owner and thus “constructively” accelerates the project.
The elements of constructive acceleration are (i) the contractor encountered a delay that is excusable under the contract; (ii) the contractor made a timely and sufficient request for an extension of the contract schedule; (iii) the owner denied the contractor’s request for an extension or failed to act within a reasonable period of time; (iv) the owner insisted on a completion of the contract within a period of time shorter to the time period in which the contractor would be entitled by taking into account the period of excusable delay; (v) the contractor was required to expend extra resources to compensate for lost time and remain on schedule.
Constructive acceleration is particularly apt in situations where the contractor is working on an “essential” project and—due to the project’s critical nature—time extensions cannot be granted. The contractor is then forced to work under adverse conditions which were not accounted for in the contractor’s bid.
- Guaranteed Maximum Price or Design Build Contracts: On GMP projects or design build contracts where contractor and owner are to share pandemic impacts, an allowance might be appropriate. Allowances are place-holder amounts created to allow the owner and contractor to estimate the ultimate cost of uncertain risks at the time the contract is executed. Allowances are generally rough orders of magnitude of the cost of the work and the contractor has no liability for an allowance that might overrun or underrun:
The Parties acknowledge and agree that the COVID-19 Pandemic is impacting the local, national, and global industry and it is currently difficult to assess the future impact to the Project. COVID-19 may impact the Project Schedule and/or Contract Sum due to potential issues including, but not limited to, the supply chain for materials, and varying agency directions, proclamations, orders, and changes to such direction in order to address social distancing and personal protection guidelines. As such, the Project Schedule and Contract Sum address current COVID-19 impacts, which are included in the Cost of Work as a COVID Allowance. This Contract, however, does not take into account future impacts due to COVID-19 supply-chain interruption and, notwithstanding anything to the contrary, in the Contract Documents any such future impacts shall entitle Contractor to an equitable adjustment to the Project Schedule. Should future materials prices increase due to supply chain interruption, new protocols be required impacting Contractor’s cost of performance, then Owner will equitably adjust the COVID Allowance in the GMP for the period of suspension, price increases, and the costs associated with same, such as extended general conditions, onsite labor maintained during the suspension, storage changes, crane and equipment rentals, remobilization of equipment removed for temporary safety, or maintenance measures, etc. Contractor, however, shall not be entitled to any fee on the COVID-specific adjustments to the GMP.
2. Public Works Projects. Public projects are more difficult because public works contracts are contracts of “adhesion” and very little negotiation, if any, is generally part of awarding public contracts. If public works projects, such as schools, public housing, and infrastructure projects, are/were deemed “essential,” in the COVID-19 pandemic, it stands to reason if the projects are essential to society in general, that the extra costs associated with dealing with COVID pandemic-caused extra costs should be shared by society in general, and not be borne by the contractor alone.
Regrettably, many public works owners have taken the position that because the pandemic is a force majeure event, and the remedy for a force majeure event is a time extension, public works owners have no obligation to grant financial relief to contractors who incurred significant extra costs in overcoming the disruption of the COVID-19 related government regulations, impact to the supply chain, and the various other effects of COVID-19. There have been a number federal government and private cases that have acknowledged and awarded contractors damages in the event of constructive acceleration. The recovery basis of constructive acceleration, as well, settled in federal courts. There are few state court cases on constructive acceleration, but there is every reason to believe that a state judge would follow the federal precedent.
In the last Washington legislative session, a number of construction industry groups introduced Senate Bill 5333:
Any clause in a construction contract, as defined in RCW 144.24.370, which purports to waive, release, or extinguish the rights of a contractor, subcontractor, or supplier to damages or an equitable adjustment arising out of a delay in performance which delay is caused by the COVID-19 pandemic emergency proclamations is against public policy and is void and unenforceable.
The effect of this bill is to have society in general, rather than the construction contractor, shoulder the financial burden alone. The logic is that since many public works projects are essential projects and benefit society, the contractor should not be forced to bear those unanticipated costs on its own, but instead the cost impact shared by society in general. Regrettably, the last legislative session in Washington was a short one and although the bill made it to the Senate floor, the legislation was not passed. Efforts will be made this next legislative session to pursue this bill again.
Comment: The COVID-19 pandemic and its fallout will likely be with us for many years in the future. For society to continue to prosper and deal with the unprecedented toll this virus is taking on our industry, we must implement fresh thinking, new ideas, and compassion to ensure that the financial impact does not fall on few members of society but is borne by society in general. This will require long-range thinking of our legislature to look past the short-term political expediencies and do what is right for our society in the long run.
 Norair Engineering Corp. Island Road v. United States, 229 Ct. Cl. 160, 666 F.2d 546, 548 (1981).