Construction and Coronavirus

close up of two men's hands, at a desk, discussing construction plans
Contractors, their customers, subcontractors, and suppliers, and customers can expect to see higher costs and price volatility, materials shortages, logistics and supply chain breakdowns, order cancellations, and extended delays in product delivery. Slower project completion times and possible legal squabbles among all the affected parties is inevitable.
 
Builders need to evaluate their supply chains and manpower needs to identify vulnerabilities, find alternative supply sources if they are needed, prepare for cost spikes, and make sure they have adequate provisions in their contracts to protect themselves from the labor problems, cost spikes, and supply chain delays and interruptions that are threatening the construction industry.

Force Majeure Clauses and Frustration of Purpose

One of the ways contractors can seek to protect themselves is by including a “force majeure” clause in their contracts. These are commonly called act of God clauses. Another contract principle that may excuse contract performance is a legal principle called frustration of purpose. Those topics are discussed in the Business and Coronavirus section of this website.
 
If what you have in your contract is not good enough, now is a good time to make repairs. 

Price Acceleration Provisions

Contractors should also consider adding terms to their contracts to protect themselves from labor and material price increases in the form of a price acceleration provision. A price acceleration provision generally provides that the roofing contractor may adjust the contract price to reflect the revised actual cost of the labor and materials. Assuming the contractor is using its own labor force, there may not be a significant enough increase in labor costs to warrant an adjustment of the contract. As a result, the price acceleration clause is usually limited to increases in materials over the course of a project.
 
You will need to document the extra costs if you rely on this kind of provision. Price acceleration clauses also sometimes contain a termination for convenience provision that may allow the contractor to escape a contract if the cost of materials has increased exponentially or the materials themselves have become difficult or impossible to find. People do not like this sort of clause, because it creates so much uncertainty. So, carefully drafted language that all parties consider fair is needed.

Smart Bidding

Contractors should be cautious when providing firm bids for contracts for projects in this environment including those that may not begin for several months. A lot can now go wrong in a short period of time. Conservative bidding is needed right now. You know the environment. So, if you make a deal, you will have a hard time saying unexpected events developed. A good contract rule of thumb is thing about what can go wrong instead of what can go right.

Communicate With Your Customers

Send prompt notice after becoming aware that COVID-19 has affected materials deliveries, labor availability, or other aspects of a project. Check your contract for what notice you must give and how it must be given. You can communicate informally to get the ball rolling, but formal noticing is needed in strict accordance with contractual notice requirements. Be prudent and send a simple notice explaining the delay, stating that the duration will be unknown, and stating that the contractor is requesting an extension of the contract performance time.  

AIA Contract Language Regarding Delay 

Contractor extensions of time under the AIA’s standard form A201 General Conditions are possible. Consider the following force majeure clause:
 
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, or of an employee of either, or of a separate contractor employed by the Owner; or Separate Contractor; (2) by changes ordered in the Work; or (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; or (4) by delay authorized by the Owner pending mediation and arbitration; or binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines may, justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine. (Emphasis added.)
The virus outbreak’s disruption to the labor and supply chain was something people could not have foreseen. Make a new contract now, and that analysis is very different.
 
AIA A201 General Conditions permit the Contractor to make substitutions of goods only with the consent of the Owner, after evaluation by the Architect, and in accordance with a Change Order or Construction Change Directive, which would be issued at the Owner’s discretion.
 
A contractor may attempt to seek compensation for increased costs associated with the high demand for specified materials or for a proposed substitute. These requests are at the Owner’s discretion unless there is a price-escalation clause permitting recovery for such costs.  Although there is no provision in the A201 providing the Contractor with a right to recover escalation costs, the AGC ConsensusDocs cost-adjustment clause, §200.1, Time and Price Impacted Material Amendment 1 (2007, Revised 2011), is a good example of a cost-adjustment clause permitting such recovery.
 
With the AGC clause, the parties agree upon baseline prices for certain materials when the contract is signed. If market prices increase, either party would be entitled to an equitable adjustment. The Contractor would also be entitled to an extension of time and payment for costs associated with any delays.

Lien Rights

View your lien rights analysis as if nothing has happened. Those deadlines are, in this case, called deadlines for a reason. You should assume you kill your lien rights if you do not act in a timely fashion.
 
Bottom line, communication is now more important than ever. Your written contract may be critically important, and you should know that what you negotiate now puts you at great risk until this crisis passes.
 
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And now the careful (paranoid?) lawyer's disclaimer: 
The matters discussed here are general in nature and are not to be relied upon as legal advice. Every specific legal matter requires specific legal attention. The law is constantly changing, and matters discussed today may not be the same tomorrow. Legal matters are also subject to different interpretations by attorneys, judges, jurors and scholars.
 
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