Time to Review Contracts and Be Prepared for Construction Delays, Suspensions and Terminations

Thomas H. Dart and Drew F. Chesanek | Adams and Reese

With the ongoing spread of COVID-19 (coronavirus), it is becoming inevitable that the preventative measures being implemented will have significant financial impacts on the construction industry. Accordingly, owners and contractors should be reviewing their contracts for their projects and prepare now for coronavirus-related delays.

Reviewing the Contract

The first order of business is to review the contract to determine what provisions may be relevant for either the owner or contractor to extend, suspend or terminate performance under the contract.

Often, there may be several theories to address the pervasive effects we are now facing, and may face, of the coronavirus. These include force majeure, impossibility of performance and contractual remedies to address delays confronting the project.

Whether an owner or contractor is seeking to extend time limits, explain delays, suspend activities, invoke force majeure/impossibility clauses or terminate the contract, it is crucial that both owners and contractors alike follow the required notice requirements as failure to do so may make any such notice voidable and ineffective under the contract.

AIA Contract

The AIA form contract, one of the most widely used forms for construction projects, contains standard language for termination or suspension clauses that could potentially be triggered by the coronavirus pandemic. Section 1.6.1 and 1.6.2 in the standard AIA A201-2017 form typically provides the format and method of delivery for notices.

In 2017, the AIA standard form was amended and this also amended a portion of the contractual termination provisions. While it is easy to tell each party to “read the contract,” there are certain provisions both owners and contractors should focus on when dealing with coronavirus-related delays.

For Contractors

Typically, § 8.3.1 of the Standard AIA outlines the basis for extensions of time for substantial completion of a project. The standard language allows for extensions of a reasonable time for “other causes beyond the Contractor’s control.”

Therefore, if a contractor is seeking an extension of time due to coronavirus, it is important to show how the current pandemic is causing delays beyond the contractor’s control.

Although epidemics are often not mentioned as grounds for delaying performance and arguably could be anticipated, the far-reaching effects of the coronavirus and the regulatory restrictions placed by the government to control the virus are unprecedented.

Additionally, § 14.1.1 allows the contractor to terminate the contract if the work has stopped for a period of 30 consecutive days through no act or fault of the contractor for either (i) issuance of an order of a court or other public authority having jurisdiction that requires all work to be stopped; or (ii) an act of government, such as a declaration of national emergency that requires all work to be stopped.

On March 13, 2020, President Trump issued a declaration of national emergency, and certain jurisdictions may soon require work be stopped, thus potentially triggering the requirement for a contractor to terminate the contract for cause.

For Owners

Owners also likely have potential recourses to suspend or terminate performance, and thus payments, under a contract.

Under §14.2 of the AIA A201-2017 standard form contract, an owner may terminate the contract if the contractor repeatedly refuses or fails to supply enough properly skilled workers or proper materials.

Additionally, an owner may be allowed to terminate the contract or order the contractor to suspend or delay work in whole or in part for such a time period as the owner may determine either with or without cause. These clauses are frequently amended or altered to address the associated cost implications of suspension or termination.

Cost Implications

The seminal issue in the event that either the owner or contractor invokes any of the aforementioned provisions, is a determination of the entitlement to, and amount of, damages. In some instances, the contract may address these issues, which can range from a fixed amount or for lost profits or the costs to cure.

For instance, under the standard AIA contract, in the event an owner terminates the contract for “convenience,” i.e., without any cause, the owner is liable to the contractor for work properly executed, costs incurred by reason of the termination (including any costs attributable to the termination of any subcontracts) in addition to the termination fee, if any.

However, if the owner suspends for convenience, the contract sum and contract time shall be adjusted for increases in the cost and time caused by such suspension or delay and include profit.

Other contracts may have provisions that where an owner terminates without cause or as a “convenience,” the owner is liable to the contractor for a termination fee determined pursuant to a stated amount or through a formula. The courts have held that any fee or “liquidated damages” are proper where the damages are not readily ascertainable at time of drawing of contract and are not merely a penalty.

If the owner were to terminate for cause, the contractor may not be entitled to receive any further payment until the project is completed. In the event the unpaid balance of the contract sum exceeds costs of finishing the project, such excess may be required to be paid to the contractor. In the event the costs or damages exceed the unpaid balance, the contractor may be liable to pay the difference to the owner.

As mentioned, both owners and contractors should expect that the coronavirus will result in construction-related delays or, in some cases, termination of the project. Therefore, it is important for contractors and owners to review their contracts so they may appropriately plan and prepare for the corresponding implications.

COVID-19 and Construction Projects: Who is responsible for Delays and Cost Increases?

Adam P. Banks, Lauren A. Triebenbach, Michelle Wagner Ebben and Roy E. Wagner | Michael Best & Friedrich

As the country braces for the continued spread of COVID-19, the disruptive effect of this virus is already evident as enumerable events, business, and schools shut their doors. This disruption is also likely to impact the construction industry in the form of labor availability, delays, and costs overruns.

Cononavirus’ impact on global supply lines is expected to be significant. Michael Best partner, Joseph Olson writes HERE about practical steps to consider to remedy supply line issues. China is one of the largest exporters of building materials. Data recently released by the Chinese government shows a 17.2 percent decline in Chinese exports compared to this time last year. Construction suppliers will likely soon feel the strain of supply shortages, followed shortly thereafter by contractors unable find the construction materials, parts, and components required to complete projects. In these scarcity situations, a contractor’s limited option may be to locate more expensive replacements consistent with the contractual terms, where the contractor might be required bear the increased costs associated with replacement parts.

The availability of labor will also suffer under the effects of COVID-19. While the current number of confirmed cases of COVID-19 in the U.S. remains somewhat manageable, health officials are signaling that a sharp increase in the number of confirmed cases and related quarantines is expected in the upcoming weeks. Contractors and project owners can reasonably expect that the virus will add insult to injury, as labor shortages throughout the construction industry are already a well know problem (read Associated General Contractors article HERE). Similarly, certain “crowded” projects may be impacted, if the site is shut down. Owners and General Contractors should anticipate slower progress on construction projects as Subcontractors struggle to keep their workforces healthy and out of quarantine.

The party that bears the risk and the losses resulting from construction delays and increased costs associated with materials shortages will be dictated by contract. Contractors and project owners would be wise to have their contracts reviewed to determine if the contract contains a force majeure or price escalation provision to address potential losses associated with COVID-19.

The party who bears responsibility for the increased materials costs likely depends on whether or not a price escalation provision was negotiated. Escalation provisions allow a party to request additional funds to cover increased materials costs associated with upward price fluctuations. It’s possible for both the Owner/General Contractor and General Contract/Subcontractor to agree upon price escalation provisions that pass increased materials costs up and down the contractual chain. Escalation provision terms vary. Most escalation provisions are tied to a standard index, for example the Consumer Price Index (CPI), and only allow for increased material costs to be passed on after an increase to the index beyond a negotiated threshold. As COVID-19 continues to disrupt world supply lines, the cost of everyday construction materials may be unpredictable. For businesses engaged in long term projects, immediate action is needed to develop a strategy to address potential price increases.

Contract language dealing with delay damages varies. Some contracts provide for liquidated damages, which entitle the aggrieved party to a set amount of damages per day/month of delay, whiles others bar damages for delay through “no damages for delay” provisions. Regardless, a force majeure provision (a/k/a Act’s of god clause) may provide the contractor with a mechanism by which to seek additional time to perform. Force majeure clauses typically provide grounds for non-compensable “excusable delay” for unexpected disruptions which are outside the control of the contractor. For example, under American Institute of Architects General Conditions of the Contract for Construction (AIA Form A201-2017), “unusual delay in deliveries” and/or “other causes beyond the Contractor’s control” may provide the contractor justification for additional time to perform. Likely, the COVID-19 pandemic would qualify for excusable delay under the AIA form, but attention should be given to individual contracts to ensure a similar remedy exists. Going forward all construction contracting drafting should anticipate COVID-19 disruptions.

As the delays and costs overruns become larger, we expect some parties may be forced to look for legal relief using non-contract arguments. Supervening events are unexpected events that occur after a contract has been executed, but before the time to complete performance is due, without the fault of either party, and the non-occurrence of which was a basic assumption of the contract. Two supervening event theories arguably applicable to the COVID-19 outbreak are “Impossibility” and “Commercial Impracticability.” Essentially, these theories allow a party to breach a contract or delay performance if performance becomes impossible or so costly that it’s commercially senseless to perform. While a government mandated quarantine likely qualifies as an “Impossibility,” other situations require a case-specific analysis. The case law on supervening events is state specific and filled with exceptions, so consultation an attorney is needed. We encourage you to reach out to one of the authors of this article, your Michael Best attorney, and/or our firm’s COVID-19 Task Force.

As the coronavirus (COVID-19) continues to spread around the world, we know there is widespread concern about public safety and business disruptions. Michael Best has formed a COVID-19 Task Force to stay up to date on the latest information from governments, public health officials and experts in various industries so we can help our clients adopt best practices for business continuity and mitigation of losses.

Coronavirus – Are We in For Historic Construction Delay Claims?

C. Michael Shull III | Frost Brown Todd

What if a general contractor’s completion of its work is delayed due to COVID-19 (coronavirus)? Is the contractor in breach? Or, is the delay in performance due to the virus excused? Does the contractor get additional time to complete work or additional compensation for the delay to its work schedule?

There are many ways that coronavirus can cause delays to a project. The supply chain can be disrupted in many ways. While lumber, steel, concrete and other materials are sourced more locally, others come from overseas, such as marble from Italy and fixtures from China. Currently, Italy and China are two of the nations most affected by the pandemic. Local agency closures may delay the issuance of permits, approvals or inspections necessary for a certificate of occupancy required for substantial completion. And, of course, workers and crews may either become ill or wish to stay home to avoid infection. Who bears this risk of delay?

When in Doubt, Read the Contract

Most construction contracts break delays down into three categories: those caused by the project owner or its design team, those caused by the contractor, and a third category where the delay arises due to neither the actions of the owner nor contractor, but from circumstances beyond either party’s control. Whether the general contractor is entitled to an extension of its agreed-upon time for performance (contract time) or an increase in compensation (contract price) in connection with the delay often depends upon the cause of delay’s category. Typically, those delays attributable to the contractor’s failures warrant neither an increase in the contract time or the contract price. Those delays caused by the owner or its team usually warrant an increase to both. Those delays caused by neither the owner nor the contractor – often referred to as force majeure events – will typically warrant an increase in the contract time and therefore relief from any liquidated damages. Still, entitlement to an increase in the contract price varies greatly from contract to contract.

Common Contractual Language Regarding Delays

Contract forms typically used in the construction industry address the issue of force majeure damages a bit differently. The ConsensusDocs Form 200, for example, drafted for use between an owner and a contractor, lists within Article 6.3 four categories where the delay is essentially due to an owner’s action or inaction, and provides both an increase in the contract time and contract price if they occur. For delays caused by force majeure events, an adjustment to the contract time is to be provided, but the provision (6.3.3) neither expressly prohibits nor requires an increase in the contract price. Is the coronavirus such a force majeure event? In fact, the ConsensusDocs 200 specifically mentions “epidemics” as a delay for which the contract time will be equitably adjusted. On March 11, 2020, the World Health Organization (WHO) announced that coronavirus was a pandemic. WHO defines a pandemic as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.”

If the coronavirus itself did not fall within the force majeure definitions of a particular contract, and “pandemic” or “epidemic” are not specifically mentioned, then possibly one of its consequences does. For example, force majeure situations under the ConsensusDocs 200 also include “transportation delays not reasonably foreseeable,” “adverse governmental actions,” and a catch-all “unavoidable accidents or circumstances.”

Another popular industry form, the AIA A201 (2017), at Article 8.3.1 offers a contractor an extension of the contract time for delays due to “labor disputes, fire, unusual delay in deliveries, unavoidable casualties . . . or other causes beyond the Contractor’s control”, as well as “other causes that the Contractor asserts, and the Architect determines, justify delay.”

The A201 does not provide for an automatic increase in the contract price for these force majeure delays (or even for delays caused by the owner). Instead, it simply says that damages for delay by either party are not precluded.

Frequently the standard terms of both the ConsensusDocs 200 and AIA A201 are revised in favor of one of the parties’ interests. For example, an owner may revise them to provide for no damages due to delay under any circumstance, even those beyond the contractor’s control. But some states have passed legislation declaring void any contract which provides no damages for delay in the event that the owner is the cause of the delay, but leaves open the issue of damages in the case of force majeure events. Even if the contract form does provide for additional time or compensation in such circumstances, however, the contractor will still need to prove that the delay was in fact occasioned by the pandemic, and likely the exact amount of time that the pandemic affected the project’s critical path, as well as the lack of available mitigation measures and the provision of notice as required by the contract.

Federal Government Contracts

Some public contract provisions, such as federal government contracts, have their terms as to delay claims determined by statute and regulation. For example, for federal government construction projects the Federal Acquisition Regulations at 48 CFR §52.249-14 “Excusable Delays” (for insertion in cost-reimbursement construction contracts among others) provide that:

. . . the Contractor shall not be in default because of any failure to perform its contract under its terms (within the Contact Time) 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, . . . (5) epidemics, (6) quarantine restrictions . . . (8) freight embargoes.

If the contractor’s failure is because one of its subcontractor’s performance is delayed by such causes, a failure to timely perform likewise will not constitute a default. 52.249-14(c) provides that upon request of the contractor of a schedule extension, the contracting officer will determine whether the contractor’s failure to meet the required schedule does, in fact, flow from one of the enumerated causes, and if so the delivery schedule shall be revised. Additional compensation to the contractor is however, not provided in such instances. The Federal Acquistion Rregulation (FAR) provision applicable to fixed-price construction contracts, 48 CFR §52.249-10, likewise provides for an extension of time for completing the work shall be provided, upon adequate proof by the contractor, that the delay in completion is due these same causes.

Relief via a claim of excusable delay due to analogous situations, such an influenza epidemic, however, has not been as easily obtained in the past as one might think. Several claims of excusable delay due to an influenza epidemic have been denied where the contractor has failed to show that the epidemic was the sole cause, not merely a contributing cause, of the performance delay. The contractor must also establish the actual extent of the delay caused by the epidemic. See e.g. Ace Electronics Associates, Inc., ASBCA Nos. 11496, 11781, 67-2 BCA ¶ 6456 (July 18, 1967) Additionally, a contractor will find difficulty alleging that its performance is excused simply because one or more key personnel were affected by an epidemic. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (August 29, 1995).

One should also take care to remember that if a delay is otherwise excusable, the failure of a contractor to establish reasons for not obtaining the requisite material(s) from another source can result in a denial of excusable delay and an extension of the time of performance. Cryer & Parker Elecs., Inc. ASBCA 15150, 71-2 BCA ¶ 8943.

The world “analogous” is used above hesitantly. Whether the coronavirus pandemic is analogous to anything seen before is surely debatable. Each day brings a fresh set of developments that suggest our current situation is unlike any faced in modern times. Returning to the FAR clauses above, the recitation of epidemics, quarantines, the sovereign action of the government, embargoes, and other circumstances beyond the control of a contractor were likely not listed with the anticipation that they might occur simultaneously.

For Contractors: Remember to provide notice. Contractors whose performance is affected by COVID-19 should provide notice as required under their contract, both in the format and within the time required. Suggest a meeting with the owner to discuss this possibility before it even occurs, if possible. Yes, the owner is no doubt aware of the pandemic in general but not yet as to your specific challenges. If a solution to the delay is possible with the owner and the architect’s approval, propose it. Owners will be keen to get the project completed as soon as possible. If the pandemic causes a full or partial shutdown of the work, remember to protect it and all materials as best as possible. If such protection requires atypical measures, discuss those with the owner to find a solution and protect materials onsite from the elements.

For Owners: If your contractor puts you on notice of a delay due to the pandemic, schedule a meeting. Identify with the contractor whether the delay is due to workforce or supply chain issues, and determine whether their effects might be mitigated by switching to materials from a different source (i.e., local rather than overseas). If the contractor on your project is already severely behind schedule here at the onset of the coronavirus pandemic, make sure to document the status of the project now in order to avoid the pandemic and its effects being used (or attempted) to excuse performance failures, and perhaps liquidated damages which have already accrued.

For Everyone: Communication on projects will be more important than ever before, because whether due to the virus’ effect on the workforce or the government’s reaction to it, all participants on a project will need to be flexible and responsive. If you are about to enter into a construction contract, go ahead and address the pandemic and possible ramifications now if you can.

We really are all in this together. Owners are anxious to get their projects completed without delays and additional costs. Contractors are worried about completing their current projects as well and maintaining the safety of their workforce. It is best to try and work mutually towards a solution as each challenge arises.

COVID-19 – From Construction to Development: Defaults, Deadlines and Dilemmas?

Lynette Khoo, Kia Jeng Koh and Pat Lynn Leong | Dentons

Introduction

We are at the cusp of a COVID-19 pandemic. In our earlier articles on COVID-19, we focused on force majeure and the legal doctrine of frustration, specifically in the context of how construction delays may impact a contractor’s obligations to the developer under the construction contract.

Since then, COVID-19 has travelled far and wide. According to the World Health Organisation (WHO)’s Situation Report No. 45 based on data as of 5 March 2020 (SR 45), COVID-19 has hit over 80 countries and crossed most continents. We reproduce Figure 1 from SR 45 found on WHO’s website:

Every day, we read and hear reports of short supply of labour, factories still closed, gradually opening and even if open, not operating at full capacity. The outbreak has reportedly caused massive disruptions to global manufacturing, transportation and cross-border supply chains.

In Singapore, this is an acute problem for contractors, because most of the building and construction industry’s materials, plant and equipment, and labour come from everywhere except Singapore – this includes Portland cement, marble, tiles, chipboard, appliances, screws and even epoxy resin! With the adoption of pre-fabricated pre-finished volumetric construction (PPVC) in many building development projects in Singapore, one can surely imagine the repercussions on the construction process even when there is only one missing item.

It is no surprise, then, that some contractors are already asserting and/or making force majeure claims. With the number of such claims likely to rise in the coming weeks, we turn now to focus on the position of the developer – how do construction delays potentially impact the developer, and in particular, the deadlines which may be imposed on the developer by various other third parties?

Deadlines Imposed on Developers

In a building development project, the developer may be subject to various deadlines which relate to construction milestones and/or are dependent on timely completion of the project under the construction contract between the developer and the main contractor. Such deadlines are imposed by various third parties, such as government agencies, individual end purchasers and lenders.

We summarise below some examples of such deadlines, as well as some practical tips for the developer:

Nature of Deadline
Consequences if Deadline is Not Met
Qualifying Certificate (QC) regimeGovernment Agency – Controller of Residential Property, Singapore Land Authority (Controller).Deadline – The QC typically requires the developer to complete the construction of the whole housing development and obtain the Temporary Occupation Permit (TOP) for the whole housing development within 5 years from the date of the QC (QC Deadline). The QC is usually backed by a banker’s guarantee or insurance guarantee for 10% of the land price (QC Security).The Controller may forfeit the QC Security.Practical Tips -If the QC Deadline is approaching, it would be prudent for the developer to review, and promptly apply to the Controller for an extension of the QC Deadline.The extension charge payable is 8% of the land purchase price for the 1st year of extension; this goes up to 16% for the 2nd year and 24% per annum for the 3rd and subsequent years.It is hopeful that the Controller will grant a waiver of or reduction in the extension charge, in view of events impacting the whole world and the local building and construction industry arising from the COVID-19 outbreak.Alternatively, if the developer is a publicly listed housing developer with a substantial connection to Singapore, the developer may also consider applying for exemption from the QC regime (pursuant to the new ground of exemption introduced on 6 February 2020). 
Government Land Sales (GLS) programmeGovernment Agency – The State and its appointed government land sales agent (for instance, the Urban Redevelopment Authority (URA)).Deadline – The Conditions of Tender and the Building Agreement (GLS Sale Conditions) for all GLS sites require the developer to construct and obtain TOP for the whole of the development within a specified project completion period (typically 60 months from the date of tender acceptance or longer, depending on the specific project) (PCP Deadline).This is usually an event of default under the GLS Sale Conditions.The GLS Sale Conditions usually do not contain any force majeure provisions which operate to suspend or excuse the developer’s performance of its contractual obligations, including its obligation to meet the PCP Deadline.Practical Tips -If the PCP Deadline is approaching, it would be prudent for the developer to review, and promptly apply to the relevant government land sales agent for an extension of the PCP Deadline.The extension premium payable is 8% of the tendered land price for the 1st year of extension; this goes up to 16% for the 2nd year and 24% per annum for the 3rd and subsequent years.Based on URA’s Circular on Extension Premium Scheme, the prevailing policy is that extensions of the PCP Deadline, without any charge or payment, will be granted for delays in work progress due to reasons beyond the developer’s control (for instance, unexpected technical problems in developing the project). It is certainly the case that construction delays arising from the COVID-19 outbreak are “reasons beyond the developer’s control” and it seems likely that these delays should be regarded as such for the purposes of URA’s Extension Premium Scheme.
Additional Buyer’s Stamp Duty (ABSD) regime – remission for housing developersGovernment Agency – Inland Revenue Authority of Singapore (IRAS).Deadline – As part of its undertaking to IRAS in exchange for the upfront remission of ABSD, the developer is required to (i) commence housing development on the site within 2 years from the acquisition date and (ii) complete the housing development and sell all housing accommodation therein within 5 years from the acquisition date.The developer is required to pay to IRAS an amount equal to the ABSD remitted, together with interest thereon at the rate of 5% per annum computed from 14 days after the acquisition date. To note the ABSD payable is not on a pro-rata basis.The applicable ABSD rates are available on IRAS’ website.
Housing Developers Rules (HDR) regime – for licensed housing developersPurchaser – Individual end purchaser of the unit.Deadline – Under the prescribed forms of the Option to Purchase and the Sale and Purchase Agreement (HDR Sale Conditions), the developer must specify the latest date for delivery of vacant possession of the unit (Vacant Possession Deadline).The developer is required to pay to the purchaser, liquidated damages (LDs) calculated on a daily basis at the rate of 10% per annum on the total sum of all instalments paid by the purchaser towards the purchase price.The HDR Sale Conditions do not contain any force majeure provisions which operate to suspend or excuse the developer’s performance of its contractual obligations, including its obligation to meet the Vacant Possession Deadline. Force majeure provisions in the facility agreement, if any, typically operate in favour of the lender.

Practical Tips -For unsold units – It would be prudent for the developer to amend the Vacant Possession Deadline to be specified in each Option to Purchase/Sale and Purchase Agreement to a later deadline. This is to minimise the risk of incurring LDs in respect of new sales.For sold units – LDs will be payable if the Vacant Possession Deadline is not met, unless the developer is able to negotiate other options with the purchaser. 

Concluding Thoughts

If the main contractor succeeds in pushing back the completion date under the construction contract legitimately, on account of its Extension of Time (EOT) claims based on force majeure, this means that the main contractor is likely to be relieved from its obligations to pay LDs for the excused period.

What happens to the developer, and its separate deadlines vis-à-vis the various third parties, then?

  • Will the developer be correspondingly relieved, in relation to the deadlines imposed under the QC regime, the GLS programme and the ABSD regime? Given the ongoing global impact of the COVID-19 outbreak, it is hoped that government agencies/the State lessor will review developers’ requests for EOT favourably (as they have done in previous crises). It is encouraging to note that the government has indicated that it is monitoring both the construction industry and the property market closely, that it will adjust its policies as necessary to ensure a stable and sustainable property market, and that it is prepared to adopt a case-by-case approach for projects which need help (see The Business Times article published on 5 March 2020 for more details).
  • Will the developer be correspondingly relieved, in relation to the deadlines imposed under its loan financing arrangements? The lender may not immediately declare an event of default and call for repayment of the loan. Nonetheless, in the case of a housing development project, a slower pace of construction and/or a significant delay in the anticipated date for obtaining TOP for the development, will result in slower collections by the developer of progress payments from individual end purchasers (and possibly also a slower pace of new sales of units in the development). This ultimately translates into higher interest costs for the developer.
  • Will the developer be correspondingly relieved, in relation to the deadline imposed under the HDR regime (i.e. from paying LDs to the individual end purchaser)? It seems not, given the absence of any force majeure provisions in the HDR Sale Conditions. While it is unlikely that the purchaser will be able to rely on the legal doctrine of frustration to terminate its purchase of the unit, the considerable quantum of LDs payable by the developer for each sold unit in the development is already fairly penalising to the developer. We hope that, for most developers who have otherwise been able to achieve a good pace on their construction, with adequate buffers built into the Vacant Possession Deadline in the Option to Purchase/Sale and Purchase Agreement, and with continued efforts of government agencies and communities to stem the spread of COVID-19, the consequences of LDs can be avoided and/or minimised.

Hence, there appears to be real asymmetry between the developer and the main contractor, especially under the HDR regime. Perhaps it is time to rethink the prescribed form of contract for the developer and the individual end purchaser (i.e. the HDR Sale Conditions) and/or manage the developer’s risk vis-à-vis the individual end purchaser by amending the construction contract that the developer enters into with its main contractor.

Who Will Bear the Risk and Cost for Coronavirus Construction Delays? A Contractual Analysis.

Peter Strniste, Jr. | Construction Law Zone

As the Coronavirus spreads across the globe, its impact continues to disrupt many industries, including construction.  Over the last twenty years, the construction industry in the United States has substantially increased its reliance on China as a supplier for all types of construction materials including electrical and lighting equipment, elevators and component parts, plumbing fittings and fixtures, and HVAC equipment.

Production lines in China are standing still while workers are quarantined or huddling in place in their homes.  Shipping containers with raw materials are backed up in China’s ports and there is no transportation to deliver finished products from factories. These supply chain shutdowns have already created increased demand for construction materials in the United States and have the potential for causing substantial construction delays and project cost overruns.

Cary Davis, an official with the American Association of Port Authorities said that “Due to the coronavirus outbreak, cargo volumes at U.S. ports might be down by 20 percent or more on a year-on-year basis compared to 2019.” An executive at national home builder Toll Brothers complained that the virus has already delayed certain lighting parts and small appliances.

While there can be no question that the outbreak of the Coronavirus in China was unforeseeable, the party that bears the risk and the loss for resulting construction delays will be dictated by the controlling written agreement.  The force majeure clause must be examined to determine if the virus outbreak constitutes an excusable delay extending the completion date and excusing the contractor from liability for any applicable liquidated or actual damages.  Any provisions governing the contractor’s ability to seek compensation for excusable delays also come into play.

The contractor would likely be granted a time extension under the AIA’s standard form A201 General Conditions, which contains 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.)

It would be very difficult for an owner to dispute that the virus outbreak’s disruption to the supply chain was somehow within the contractor’s control. However, force majeure clauses are  often revised from their original form, transferring the risks of the unknown to the contractor.  For example, the following force majeure clause appeared in an agreement recently presented by a large developer to a contractor for execution:

Delay. Contractor shall take all necessary actions required to remedy any delay due to the fault of Contractor or anyone furnishing labor, materials or equipment under Contractor, including, without limitation, providing additional forces to perform the Work, or working overtime at Contractor’s sole cost and expense. Owner shall also have the right to supplement Contractor’s forces, without termination of this Agreement, in the event Contractor fails to take the measures set forth above for curing Contractor’s delay in performing the Work, the cost of which shall be deducted from any amounts otherwise due Contractor hereunder. Contractor shall be responsible to Owner for damages resulting from delay caused by Contractor or anyone furnishing labor, materials or equipment under Contractor. Contractor shall be entitled to a time extension for all delays in the critical path activities of the Work caused by Owner, or other events beyond the reasonable control of Contractor, and such extension of time shall constitute Contractor’s sole and exclusive remedy for damages caused by such delay.

This provision does not provide the Contractor with any right to a time extension or compensation for delays relating to disruptions in the supply chain as a result of the virus.  Placing aside the Contractor’s ability to recover its costs for such delays, without a time extension, the Contractor could also be subject to liquidated damages or the owner’s actual damages.

Even if a time extension is granted, whether it is compensable will turn on whether the contract has a “no damage for delay” provision or other clauses limiting the contractor’s compensation for delays. Many such clauses will limit the contractor’s compensation for delays to its direct general condition costs or to an agreed-upon in-advance unit price for daily general condition costs.

A strategy for limiting delays from the outbreak may be to try to substitute materials or equipment manufactured in China with products made in the United States. Demand for these substituted materials already has driven up costs. Standard form construction contracts permit substitutions under certain circumstances in which there is also a cost savings to the owner. As such, any increased costs for a substituted product are usually the sole responsibility of the contractor.

For example, the AIA A201 General Conditions permit the Contractor to make substitutions 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.

Whether you are negotiating a contract for a new project or in the middle of construction, it would be wise to consider who will bear the risks and costs associated with the still evolving Coronavirus.