Neil Keenan, William Abramovicz and Matthew Bedan | Forensic Risk Alliance
The COVID-19 pandemic continues to impact all facets of the global economy, disrupting supply chains and work forces, and straining contractual relationships between businesses. These issues are especially important in the construction industry, which traditionally relies on precise schedules of workers and material, and endeavors to limit potential delay claims in order to ensure profitability. These critical schedules are being impacted in a variety of ways, including changing government executive orders, sick or quarantined workers, and supply chain interruptions. In many cases, COVID-19 orders from public officials impose new job site standards, such as mandatory social distancing, use of personal protective equipment, and quarantine periods for workers crossing state lines. In many areas, projects are shut down completely. For example, 85% of New York City operating sites were on pause by mid-April. As the industry reacts, we can expect an uptick in related litigation in the form of breach of contract actions and force majeure claims.
It is critical for construction firms to plan for this disruption to protect assets, ensure business continuity and renegotiate project planning and financing, with labor shortages among the primary concerns. This may be caused by the illness itself, mandatory state/local government quarantines, or even union guidelines encouraging workers to stay at home. This was the case when the North America’s Building Trades Unions (NABTU) and the Center for Construction Research and Training (CPWR) urged anyone feeling sick to not go to work on March 11 this year. Travel restrictions could similarly limit the availability of high-skilled personnel who are essential for the completion of specific key tasks, like experts traveling from one project to another to help teams on the ground resolving technical issues. In addition, certification visits and inspections may be delayed or canceled, resulting in delays for otherwise functioning construction sites.
The pandemic is squeezing supply chains and creating difficulties including late or canceled deliveries, and price escalation from suppliers. The consequence is that many construction sites have been shut down for an indefinite period of time. On March 27, ABC News reported that Ken Rigmaiden, the general president of the International Union of Painters and Allied Trades, estimated that “half of the construction sites in the country have shut down since the COVID-19 pandemic began.” These closures generate significant unanticipated costs that could grow due to extended periods of storage for some materials and equipment, which were delivered before the shutdown but have not yet been installed. There are also many construction sites with dangerous or valuable materials that must be secured and maintained around the clock, quarantine orders notwithstanding. Finally, late payments from customers may have a significant impact on firms and their capacity to finance the goods and services required to complete a project. As much of the world economy remains locked down, alternative financing sources begin to diminish, further endangering projects.
As COVID-19 testing increases and the required personal protective equipment becomes more readily available, we can expect work to resume on many sites, but not without glitches. In the short term, demand for construction materials and skilled resources likely will remain high. Shortages of key variables combined with cash flow and financing difficulties will result in additional costs and delays, potentially further fueling the litigation wave.
Businesses should remain aware of fraud risks inherent to the unprecedented situation. The shortage of supplies and materials could lead suppliers to break contractual terms related to pricing so they could sell their goods to other customers willing to pay a higher price. This period of inactivity is also favorable to assets misappropriation. For example, inventory checks should be performed before and after the shutdown, as the risk of materials disappearing or being diverted would increase.
Businesses with ongoing construction projects’ top priority should be to document every event causing a delay or cost increase. Documenting this evidence daily is critical to establishing a potential claim—or defending against one—and later quantifying damages. At FRA, we have experience establishing and supporting—or defending against—such claims, including preparation of economic damages and quantum models, and providing forensic analysis of overcharges, improper payments, questionable or unsupported costs and other allegations. For example, we recently assisted an NYSE-listed real estate development firm with a multi-million dollar dispute involving one of its construction sites in India. This review included key vendor analysis, tax and royalty payments, daily construction reports, actualized project schedules, personnel interviews and onsite visits spanning multiple cities, which resulted in evidences of invoice padding. FRA has also achieved remotely what others could not, by deploying remote data collection, remote transaction testing, remote interviews, and other remote procedures. We plan to continue using these solutions in order to help our clients navigate through this pandemic and beyond.