COVID-19 Strategies for the Construction Industry

Christopher Sweeney, Stephen M. Seeger and Jesse S. Keene | Cozen O’Connor

As the scope and impacts of the novel coronavirus (COVID-19) pandemic continue to grow, everyone is struggling both to adjust to new ways of life and to grasp what all of this will mean for business. How governments respond to COVID-19 is changing hourly, with more and more businesses forced to run at skeleton crews or shut down altogether. There will be substantial delays and cost impacts as a result of COVID-19 and related government actions, but there is no way to predict what those impacts will be or when they will end. Some contractors may not be feeling any of the impacts yet because they have not been told to shut down or because they are considered “essential” for purposes of government work restrictions. However, it is very possible and likely that at some point, work will grind fully to a halt. Even if it does not stop altogether, work will be more costly or may take more time because of the totality of many small impacts. While it is impossible to predict the full impact of this entirely unprecedented pandemic, there are important actions that construction industry contractors, subcontractors, and suppliers should take now to better control their future when things start shaking out. Below are some of these steps that should be taken immediately to make safe your work force, your contract rights, and your cash-flow.

SAFETY

Of course, the absolute first step is for every company to make sure that it takes proper precautions to protect its employees and their families. Most construction work cannot be done remotely, or properly performed while social distancing, but steps can be taken to blunt the growth of COVID-19.

Check for official guidance

Everyone should regularly check for updates from their local health authorities, local governments, and the CDC for guidance in protecting employees, particularly those who are in increased risk groups. To the extent governments or authorities do not shut down operations, contractors should consider staggering shifts and sequencing work areas to avoid unnecessary grouping of workers.

Work remotely (where possible) and observe social distancing

Consider making project management meetings teleconferences and temporarily eliminating tool box talks, or doing so with substantially smaller groups. Of course, none of this should come at the cost of other critical safety measures on a project. Social distancing will not excuse any failure to have proper supervision, safety inspections, or accountability when performing dangerous work. The right thing to do will vary by company, by location, by trade, and, as this outbreak and government responses evolve.

Adapt your safety policies

Contractors should reassess and revise in writing their safety plans now and as more information becomes available — this includes for home office and trailer-based employees.

PROTECT YOUR CONTRACT RIGHTS

You must review every contract — upstream and downstream — to understand how they address delays, changes, and notice. Most contracts provide for some relief due to force majeure events or “acts of god.” While the industry will debate for months and years to come whether any given COVID-19 related impact is a force majeure event or a change under the contract, it is critical that contractors meet the contractual notice requirements immediately. Most changes and force majeure provisions require contractors to provide notice upstream within only a few days of the event causing the time and/or cost impact. Failure to do so usually results in a waiver of any right to additional time or costs. It is therefore paramount that contractors get their notices out as quickly as possible, even though the full impact is not yet known.

Once the initial notices are out, that is only the beginning. Contractors must look downstream and seek written assurances that materials and equipment will be delivered as scheduled and that work will be completed on time. When adequate assurances cannot be provided, contractors must explore options. As contractors start understanding and quantifying the impacts in terms of both time and cost, they should communicate the information upstream and insist upon written directive to undertake any change from the original plan.

The need to update your initial notices may be defined in the contract documents. If not, contractors should work with their upstream and downstream partners and come up with a reasonable schedule. Although upstream entities (owners, GCs, etc.) may discourage contemporaneous and detailed documentation of these changes, you should remind them that we are all in an unprecedented era and these notices and documentation will only help all parties unravel the full mess from this when the dust settles. If you cannot come to agreement on a schedule of updates, document your attempts to develop a schedule and then continue to provide the updates as regularly as reasonably possible.

PURSUE AVAILABLE INSURANCE COVERAGE

Contractors often have very broad and sophisticated insurance portfolios, but quite often do not really know what is or is not covered. On each job, you need to determine all of the applicable policies that may protect you. This includes downstream contractors that have included you as an additional insured. It may include policies from upstream such as those in OCIP or CCIP programs. It may even include builders risk policies. This is a good time to see if interruptions or impacts from this pandemic, specifically impacts from government actions in response to the outbreak or impacts from the supply chain, are covered by insurance. If there is a potential for coverage, it is important to submit your claim carefully and as required by the specific policy. As with notices under construction contracts, notices under insurance policies often must be made promptly or within a reasonable period of time after discovering the occurrence.

CALL ON YOUR SURETIES

If there are performance and payment bonds on the job, or subcontractor default insurance, you should start immediately exploring whether the surety will be available to help finish the work or pay for it. If you posted bonds and you foresee cash-flow being tight in the coming months, consider enlisting your surety now to help you through the upcoming downturn.

DOCUMENT EVERYTHING

Contractors must carefully track and document their time and costs in detail. Cannot get full crews on site because of travel restrictions? Document it. Having difficulty obtaining materials or procured equipment because of trade disruptions or international border closures? Document it. Need to spend five times as normal for basic project necessities such as gloves and safety masks? Document it. Experiencing lower production because trades are working farther apart or other “social distancing?” Document it. All construction on your project halted by government order because it is “nonessential?” Document it.

What do we mean by “document it?” To start, contractors need to meet what is required in their contracts in terms of who receives notices, when they are due, and what level of detail is required. Meeting the contract requirements is of course important, but you should consider this the floor and not the ceiling of your efforts. Contractors should track carefully and daily the impact to every person, piece of equipment, and delivery of materials. Most contractors are already in the habit of keeping daily reports, however, these reports usually only give raw numbers of workers on site and vague descriptions of areas of work. Make it a practice moving forward to include more information.

Identify daily project work data

As always, be sure that your daily reports detail and identify which workers were doing what, where, and for how long.

Note sick workers

You should now specifically note which workers called in sick or because they had to take care of dependents.

Track delivery dates and issues

Identify what materials did or did not arrive on site and include information from downstream suppliers about issues they anticipate or which may arise.

Identify inefficiencies and delays

Be careful to observe and track what work was slowed or made less efficient because of social distancing or other changes made in response to COVID-19.

Include productivity metrics

If you think your productivity has been degraded, you must measure and document the units of production and hours spent.

This is a start, but it is going to have to be tailored to each job and each circumstance. What project managers, superintendents, and forepersons should be considering in preparing these reports is “will someone in two years be able to read this and understand how and why we were delayed or why our costs increased?” Because that is exactly what will be happening.

PLAN FOR THE WORST

The only thing that we can predict about this pandemic is that it is going to get worse before it gets better. There already have been substantial layoffs and companies will likely have to make other hard decisions in the coming weeks and months. Government funds to prop up various industries will most likely come, but it may be too little, too late. As a result, a number of construction companies will likely face bankruptcy. If you are concerned that bankruptcy is a possibility for your company, you should consult bankruptcy professionals now.

Re-double your diligence in terms of payment

As always, make sure that your downstream contractors (through all relevant levels) are providing releases of lien and claims each month.

Keep your eyes open and ears to the ground

Contractors experiencing sudden changes in management, labor roll-over, or equipment or material shortages may be in crisis. If you have concerns, ask for confirmation/proof of payment to all laborers, including withholding taxes, union benefits, and insurance premiums.

Plan for downstream contractor bankruptcies (remember the 2008 financial crisis)

It is likely that you will be tied-up in another company’s bankruptcy proceedings in order hire a replacement contractor to move the job forward, or trying to get money you are owed, or trying to avoid giving back payments received in the lead up to that company’s bankruptcy.

GET PRACTICAL LEGAL ADVICE NOW

The effects of the COVID-19 pandemic are evolving and growing every day. While your projects may be entirely unaffected today, they could all be shuttered tomorrow due to government action (e.g. Boston, Pennsylvania, and California) or insolvency from the project owner as a result of the stock market. In order to best respond to each development, contractors are best served by consulting with attorneys sooner rather than later. While it is possible to develop strategies to avoid or pursue claims after the fact, it is almost always more expensive and less likely to succeed. Early intervention to ensure proper contract compliance and detailed documentation procedures is an important step to help manage some of the uncertainty and risk facing the construction industry right now.

Coronavirus: Construction Industry Impacts

Matthew Emmons, Samuel Gregory and Mark Mercante | Baker Donelson

In early March, COVID-19 seemed like a distant threat, but we are now all too well aware of its rapid intercontinental spread. In the less than three months since the first case out of Wuhan, China was reported to the World Health Organization (WHO) on December 31, 2019, COVID-19 has spread to every continent, except Antarctica, and has been declared a pandemic and national, state, and local emergency. To date, more than 205,000 cases have been reported worldwide, with approximately 6,500 of those in the United States. Concerns about COVID-19 have impacted multiple facets of our day-to-day lives, from business and school closings and restrictions on travel and public gatherings, to stock market volatility.

The construction industry will not be spared from the impacts resulting from COVID-19. Projects across the country are already experiencing issues like jobsite shutdowns, labor and material shortages, and material price escalation, just to name a few. Owners, contractors, subcontractors, suppliers, and all other project participants should be preparing now for the unique and rapidly evolving challenges the construction industry will continue to face as the virus spreads. This alert offers insight on some of the key issues members of the construction industry should be evaluating now so that they will be prepared if and when this pandemic impacts one of their projects.    

A. Force Majeure Clause

For COVID-19-impacted projects, one of the first questions will typically be whether your construction contract contains a “force majeure clause” and, if so, whether the scope of that clause covers the situation presented. Force majeure provisions, sometimes known as “act of God” clauses, may excuse contractual obligations due to unavoidable circumstances outside of a party’s control.

Some form contracts specifically include “epidemics” as a force majeure event, such as ConsensusDocs 200 and Federal Acquisition Regulation (FAR) 52.249-14, whereas the force majeure language in the standard AIA construction contract general conditions (Section 8.3.1 of both the 2007 and 2017 versions of the A201) does not. Regardless of whether the force majeure clause specifically includes the words “epidemic” or “pandemic,” a party must evaluate how the circumstances could be interpreted under the contract language.

If a party intends to raise a force majeure event to attempt to excuse performance of its contractual obligations, it should begin gathering supporting information and documenting impacts immediately. For example, if getting materials from China is an issue, the China Council for the Promotion of International Trade can issue a “force majeure” certificate. Closer to home, President Trump declared COVID-19 a national emergency on March 13, 2020, and several governors have declared a state of emergency as COVID-19 has spread. Also, the WHO declared COVID-19 a “public health emergency of international concern” on January 31, 2020, and a “pandemic” on March 11, 2020. Force majeure must also be viewed in the light of any potential concurrent delays that are separately impacting the project critical path.

Additionally, notice of the force majeure event and its anticipated project impacts should be provided to the other party in accordance with the contractual notice provisions. Timely notice and open communication among all parties could help mitigate impacts and facilitate agreements on otherwise contested issues.

Finally, when entering into new contracts, carefully consider whether to specifically include or exclude infectious diseases, epidemics, pandemics, and other potential COVID-19 impacts. Foreseeability often comes into play in a force majeure analysis. Now that at least some of the risks associated with COVID-19 are known (or reasonably foreseeable), a party seeking to raise the current pandemic as a force majeure event under future contracts may face challenges based on that party’s knowledge of those potential risks.

B. Price Escalation Clause

Some contracts may contain a price escalation clause that permits the adjustment of the price of certain materials or equipment if their price has changed by a certain amount since the execution of the contract. Such provisions may also allow for the use of an acceptable substitute if the specified material or equipment is unavailable or its use is no longer economical. These clauses may also allow an extension of contract time for any delay in obtaining the materials or equipment. It is prudent to analyze any such clauses now and consider whether a price increase or the use of substitute materials or equipment may be warranted. As with force majeure, any contractually required notices should be provided.

C. Common Law or Statutory Defenses

Despite their prevalence, some contracts do not contain force majeure or price escalation clauses. In those instances, common law or statutory defenses from the relevant jurisdiction (be sure to check for choice-of-law provisions) can become critical. Some jurisdictions will find force majeure clauses implied. Further, many states recognize defenses of impossibility and frustration of purpose. For example, Louisiana Civil Code articles 1873-1878 provide default rules for when a “fortuitous event” renders a party’s performance of a contract “impossible” either in whole or in part. The potential applicability of such defenses should be analyzed under the law of each jurisdiction and the unique facts of each case.

D. Potential Insurance Coverage

Most construction contracts require parties to maintain minimum levels and types of insurance and often require the naming of other parties as additional insureds. Because of the number of policies potentially at play, it would be wise to proactively evaluate potential coverages and have a plan in place for submitting a claim if impacts from COVID-19 appear to implicate coverage. Available coverage may not be readily apparent, but coverage could be triggered as circumstances change.

For more information specific to this topic, please contact the author or any member of our Construction Practice Group. Also, please visit the Coronavirus (COVID-19): What you Need to Know information page on our website.

Avoid Five Common Fraudulent Schemes Used in Construction

Ken Van Bree | Construction Executive | October 13, 2019

Here’s an attention-getting statistic: A typical case of fraud in the construction industry has a median loss of $227,000, according to the 2018 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE) on occupational or internal fraud. This report further showed that the construction industry’s median loss is approximately $119,000 higher than the average fraud losses across all industries.

Construction companies are most at risk for fraud related to corruption (such as bribes and kickbacks), billing related schemes, expense reimbursements, check tampering and equipment or material theft.

This brings up three important questions:

  • What are the fraud schemes affecting your company?
  • How can contractors keep their companies from experiencing these types of fraud?
  • What is the profile of fraudster?

The threat of fraud can never be wholly removed; however, companies should take steps to identify likely fraud schemes they might face. Below are a number of schemes frequently used to defraud construction companies.

1. BID RIGGING AND CORRUPTION

Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study, 42% of the fraud cases examined in the construction industry had an element of corruption.

Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud.

2. BILLING SCHEMES

 The ACFE report indicates that billing schemes account for 37% of the fraudulent activity in construction companies.

The schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee) and purchase of personal items with company funds.

3. EXPENSE REIMBURSEMENTS

The construction industry is subject to the same fraudulent activities faced by almost every other industry when it comes to expense reimbursements. Overstated expense reports accounted for 23% of fraudulent activity found in construction companies.

4. THEFT

The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Jobsites can be in remote areas or some distance from the corporate headquarters and subject to less supervision.

Additionally, materials on jobsites are hard to track and measure during the construction process. Items lying around a jobsite such as lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place.

5. MISUSE OF COMPANY EQUIPMENT

Similar to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.

THE IMPORTANCE OF INTERNAL CONTROLS

 A company must design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties.

For example, the person in charge of setting up vendors should not be the person who approves vendor payments or reconciles bank statements. Moreover, the payroll clerk should not be the same person who disburses paychecks.

Proper segregation of duties applies to all areas of business and can be employed effectively at little or no cost.

Here are some other simple yet effective internal controls that can be implemented with relative ease.

  • Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.
  • Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.
  • Require that materials estimates above a specified amount include quotes from two or more vendors.
  • Make purchases only with pre-numbered purchase orders and match them to receiving reports and invoices before payment is made.
  • Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information.
  • Reconcile contract billings with general ledgers monthly and calculate under billings and overbillings.
  • Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules.

Preparing financial statements on a monthly basis can be very helpful for understanding the health and viability of a business in addition to maintaining a secure control structure.

It is important not to put too much reliance on a single control, but rather have a series of processes that will prevent and detect fraud.

KNOW THE SIGNS

It can be just as important to understand the profile of a fraudster as it is to know the typical fraud schemes. Less than 10% of the fraudsters had been previously convicted of a fraud-related offense prior to committing the crimes examined in the ACFE study.

Additionally, 82% of fraudsters had never been punished or terminated by an employer for fraud-related conduct. This shows that while background checks are useful in screening out some bad applicants, they might not be effective in predicting fraudulent behavior.

Most fraudsters display some warning signs, such as living beyond their means, financial difficulties or having unusually close associations with vendors or customers.

Training for employees, management and auditors to recognize these warning signs is important to help detect fraudulent behavior.

OSHA’s Top 10 Most Cited Violations – For the Construction Industry

Below is the list of the most cited OSHA violations for the construction industry (NAIOS Code 23 Construction) for Fiscal-Year 2014 (October 2013 – September 2014), included are the title and standard number along witht the top 10 rank for the previous year and the  number of citations.

1 – FALL PROTECTION

Standard Number 1926.501

Title: Duty to Have Fall Protection

FY2013 Top 10 Rank: 1

Number of Citations: 6,064

2 – SCAFFOLDS

Standard Number 1926.451

Title: General Requirements

FY2013 Top 10 Rank: 2

Number of Citations: 3,834

3 – LADDERS

Standard Number 1926.1053

Title: Ladders

FY2013 Top 10 Rank: 3

Number of Citations: 2,361

4 – FALL PROTECTION TRAINING

Standard Number 1926.503

Title: Training Requirements

FY2013 Top 10 Rank: 4

Number of Citations: 1,461

5 – PERSONAL PROTECTIVE AND LIFE SAVING EQUIPMENT

Standard Number 1926.102

Title: Eye and Face Protection

FY2013 Top 10 Rank: 6

Number of Citations: 1,051

6 – PERSONAL PROTECTIVE AND LIFE SAVING EQUIPMENT

Standard Number 1926.100

Title: Head Protection

FY2013 Top 10 Rank: 7

Number of Citations: 893

7 – TOXIC AND HAZARDOUS SUBSTANCES

Standard Number 1926.1200

Title: Hazard Communication

FY2013 Top 10 Rank: 5

Number of Citations: 821

8 – GENERAL SAFETY AND HEALTH PROVISIONS

Standard Number 1926.20

Title: General Safety and Health Provisions

FY2013 Top 10 Rank: 10

Number of Citations: 757

9 – SCAFFOLDS

Standard Number 1926.453

Title: Aerial Lifts

FY2013 Top 10 Rank: 8

Number of Citations: 721

10 – EXCAVATIONS

Standard Number 1926.453

Title: Specific Excavation Requirements

FY2013 Top 10 Rank: 9

Number of Citations: 614

 

http://www.constructiondataquarterly.com/0415/files/24.html

Binding Bids

The construction industry operates by word-of-mouth to a great extent. Therefore the question: How binding is someone’s word.

A typical example of verbal arrangements in the construction industry is subcontractor bidding. In typically last-minute preparations of their bids contractors and subcontractors rely on verbal prices from subcontractors and material/equipment suppliers.

The contractor or subcontractor involved will usually rely upon those verbal bids in fixing his own bid. If awarded the contract, he would then call upon the bidder to perform or supply equipment or materials at the price verbally bid.

What happens if the bidder refuses or has attempted to withdraw his bid sometime earlier?

Legally the bid is an offer and under traditional law an offer may generally be withdrawn at any time before it is accepted by the party to whom the offer is made. Another legal rule involved is that to be a valid contract the parties must agree upon all material terms.

The application of those legal principles to the above example suggests two problems: (1) if the bidder can withdraw or refuse to honor its bid, the whole bidding process is frustrated, and (2) the verbal did usually includes only a price. Agreement on many other terms would still need to be agreed upon in the formation of a binding contract.

A number of courts have wrestled with this problem. Older cases usually ruled that verbal bids were not binding. However a number of recent court decisions ruled that the bidder can be legally bound to his bid made with the knowledge that it would be relied upon by the party to whom the bid was submitted.

Those courts’ rulings are based upon doctrines of fairness and practicality, recognizing that to rule otherwise would be unfair to the party whose only bid relied on the bidder’s price.

In the construction industry, bidding practices, constraints of time and last-minute pricing efforts do not usually allow for solicitation and the submission of written bids containing all legal niceties.

One court decision [Harry Harris, Inc. v. Quality Construction Company of Benton, Kentucky, Inc., 593 S.W.2d 892 (Ky. App. 1979)] ruled against the subcontractor who attempted to withdraw its bid after discovering a $9000 error. The court permitted the contractor recover the difference between that subcontractors bid and a higher cost paid another subcontractor for the work involved.

A Colorado appellate court decision held that a subcontractor – bidder was bound by his bid and liable for damages when he refused to perform because the contractor had relied on his bid.[Mead Assoc., Inc. v. Antonsen, 667 P.2d 434 (Colorado App. 1984)].

The fact that there is lack of uniformity in court decisions in the several states, suggest the establishment of bidding procedures designed for the purpose of avoiding problems of this nature.

Such procedures should include the best documentation possible. The very minimum a written memorandum of every verbal bid should be made and. The memorandum should include the name of its author, the name of the company and person making the bid, the precise time and date, the amount and scope or identification of the work, material or equipment contemplated and any other details involved.

Consideration should also be given to letter confirmation of its containing language to the effect that if awarded the contract, the bidder will be expected to enter into a subcontract or purchase order agreement with terms as set forth in an enclosed subcontract or purchase order form. Naturally, if time permits, a written contract or subcontract, subject to award would be legally preferable.

Apart from the practical lessons to be learned from this discussion is the fact that the law is not static. As typified by the Kentucky and Colorado cases cited above, the law does change to meet current business conditions and concerns of fairness and practicality. However, changes is usually slow and evolutionary and for that reason sound business practices dictate efforts to either conform to existing law or meet legal changes.

This Construction Law Brief® – submitted by attorney Albert B Wolf, Wolf Slatkin and Madison, Denver, Colorado – phone 303 355 – 2999, email: alwolf@wolfslatkin.com

EDITOR’S NOTE:  Albert B. Wolf is a principal in the Denver, Colorado law firm of Wolf Slatkin & Madison P.C.  This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive.  Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.