The Federal Reserve’s Powers to Pave the Way for Continued Development and Construction Through COVID-19

Virginia Trunkes and Endicott Peabody | Construction Law Zone

As the Coronavirus has encapsulated the world, government go-aheads to construction firms are welcome relief to the industry. Lenders’ collective reaction to the current economic concerns is another matter. Future financing is always imperative to ensure ongoing construction as well as new projects.

Government responses are changing by the day, but the Federal Reserve has acted decisively and thoroughly in response to the economic threats following the Coronavirus outbreak. Staying true to its Congressional mandate to “promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system”, the Fed has devised numerous strategies to meet the persistent demand for redemptions and infuse money into the market. It has cut interest rates to zero, coordinated with other central banks to encourage purchases of the U.S. dollar, committed to purchasing an unlimited amount of U.S. Treasuries and mortgage-backed securities, and explicitly encouraged banks to reduce their reserves held against demand deposits (by eliminating entirely reserve requirements).

Additionally, the Fed established five new Facilities that will be funded in part with $30 billion in equity from the Department of the Treasury:

  • Primary Dealer Credit Facility: will purchase new eligible corporate bonds from investment grade issuers and will issue loans to same;
  • Secondary Market Corporate Credit Facility: will purchase outstanding corporate bonds, possibly including some eligible investment-grade corporate bond exchange traded funds;
  • Term Asset-Backed Securities Loan Facility: will extend non-recourse loans to eligible borrowers, securitizing them with assets such as student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration;
  • Money Market Mutual Fund Liquidity Facility: will extend non-recourse loans to eligible financial institutions in exchange for their purchase of high-quality assets from money market mutual funds, including municipal variable rate demand notes and bank certificates of deposit; and
  • Commercial Paper Funding Facility: will buy commercial paper (short-term loans and tax-exempt/municipal), reducing the risk that eligible issuers will not be able to repay investors, so as to encourage investors to engage in term lending in the commercial paper market.

The Fed also plans to establish a “Main Street Business Lending Program” targeted at small-and-medium sized businesses. Collectively, all of the Fed’s new actions and Facilities are designed to lower the cost of longer-term debt, promote liquidity and increase the flow of credit to American businesses and families. Companies can access this credit to meet current operational needs and invest in new capital spending.

The Fed’s exclusive ability to alter the money supply and credit conditions, and willingness to do so, should spur the necessary institutional lending that can sustain development and its consumers through these troubled times. Many architecturally notable buildings have been completed in prior deep economic contractions such as Eleven Times Square (NY Times building) in New York; 550 Madison Avenue (Sony Tower) in New York; 1111 Lincoln Road (Herzog and de Meuron’s parking garage) in Miami; 200 Clarendon (Hancock Tower) in Boston; and of course, the Federal Reserve Bank Building in Boston. So long as the lenders follow the lead of the Fed, new architectural beauties will continue to unfold and prosper.

Practical Tips For Ohio Construction In Response To The Coronavirus Pandemic

Thomas Rosenberg | Roetzel & Andress

On March 22, 2020, Governor DeWine issued a Stay at Home Order that permits essential infrastructure projects to continue performance. Essential infrastructure includes construction projects and specifically, the Governor’s Order makes it clear that public health emergency, hospital construction, construction of long-term care facilities, public works construction, school construction, essential business construction and housing construction constitute essential infrastructure projects. The Governor’s Order indicates that essential infrastructure is to be construed broadly in its definition and therefore all construction projects are deemed essential infrastructure projects. Note, other states including border states such as Pennsylvania have taken a contrary position and have ordered all construction contractors to cease work. For the time being, in Ohio, contractors can continue to work however, they have to follow the social distancing requirements, including maintaining six-foot social distancing from other individuals, washing hands with soap and water for at least twenty seconds as frequently as possible or using hand sanitizer, covering coughs or sneezes, regularly cleaning high touch surfaces and not shaking hands. 

Even though work can proceed, it is important for contractors to examine their construction contracts to determine their rights and obligations under the current coronavirus pandemic circumstances. 

First, determine whether your contracts have a force majeure clause. Force majeure is a term commonly used for contract clauses that deal with unexpected events beyond the control of the contracting parties. The coronavirus pandemic qualifies as a force majeure event. When a contract includes such a clause, it will control the party’s rights, obligations and potential remedies. 

If a force majeure clause exists, it is important to provide notice within the contractually prescribed time-frame to the Owner or other entity the construction contractor has a contract with, of any impact upon performance. The notice requirements of the contract must be met and they often specifically require written notice, not e-mail notice, and may require notice to be sent to a specific individual. While you may not know the full impact or monetary impact of the delays caused by the virus, you are likely obligated to put parties on notice within a limited amount of time after becoming aware of the potential impact. Since the full extent of the impact is not known, the notice should state that supplemental information will be submitted when you are in possession of more detail about the impact and monetary costs incurred. 

The impact to construction contractors may include delays in meeting the contract schedule, potential delays in acquiring materials especially if the materials are being delivered from a location out of the country, shortages of labor, potential demobilization and re-mobilization costs, and further additional costs. To the extent applicable, a construction contractor should identify these types of circumstances in its notice letter even though it may not know the full extent of the impact at present. 

If a force majeure clause does not exist in your contract, you still may be excused from complete performance as a result of the present circumstances. Give timely notice as set forth above. Most construction contracts have clauses in them that still require timely notice of any impact to a contractor’s ability to perform or circumstances that could give rise to delays, increases of costs, schedule delays and other circumstances impacting performance. 

All contractors have an obligation to mitigate the damages resulting from any delay. In this case, certain steps may not be able to be taken, but contractors should consider what they can do to minimize the losses being sustained. Is there work that can be performed partially off-site, or elsewhere? Is there rental equipment that could be returned so that continuing rental costs are not incurred if you are unable to perform? 

On federal projects, the coronavirus is clearly established in federal regulation as a limitation on performance. Federal Regulation 52.240-14 provides that a contractor shall not be in default of any failure to perform if the failure to perform arises from causes beyond the contractor’s control and without the fault or negligence of the contractor and includes epidemics and quarantine restrictions as examples of such causes. On federal projects, however, construction contractors still must provide notice. 

In summary, while construction currently can proceed in Ohio, circumstances exist that may cause delays, increased costs and other losses to construction contractors. Closely follow the contract documents in all respects to provide timely, proper notice, keep track of costs and delays incurred and supplement notice on a regular basis if able to do so. Even though presently the Governor’s Order allows construction to proceed, there are going to be many circumstances where it cannot in full, in part or as expeditiously as desired as a result of the virus’ impact on labor, material availability and the like.

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.

Disrupting the Disruptor: How a Prepared and Proactive Owner Can Mitigate the Effects of Coronavirus on Construction Projects

Scott A. Greer, John H. Fontham and Kaleb Walker | King & Spalding

Once a remote health issue in China, the rapidly spreading coronavirus (COVID-19) has become not only a global health concern but also potentially a global economic disruptor that could impact nearly every industry. The construction industry is no exception, and owners and contractors alike should evaluate and take proactive measures with respect to the physical and economic risks that coronavirus could pose for their projects. For owners and contractors, the virus presents significant risks to critical aspects of the project, including the health of project personnel, potential supply chain disruptions, and the increased potential of cost impacts and schedule delays, regardless of the contractual responsibility for infectious diseases. However, prepared and proactive owners and contractors can, with some forethought and groundwork, take simple yet effective measures to mitigate—or even prevent—these potential health, cost, and schedule risks.

Take Care of the Owner Team

A critical step for any owner is to take care of its personnel on the project, ensuring that such personnel are safe and able to successfully execute their roles on the project. This includes setting up the proper procedural infrastructure to minimize the risk of infection and to keep all personnel healthy and working—no matter the work site.

Developing and implementing a basic, multi-faceted COVID‑19 risk management plan is a good starting point. One aspect of the plan should be to manage the travel of the owner’s personnel to reduce the risk of infection. As an initial step, an owner might set up (and continually update) a list of countries to and from which its personnel should consider not traveling without company approval, or if travel is necessary, establish conditions and precautions under which such travel is taken. An owner should also consider eliminating all non‑essential travel. If someone has already traveled to a restricted country without necessary precautions (whether for business or personal reasons) or otherwise becomes infected, a next step would be to evaluate the impact that this travel might have on such person, including potentially implementing a mandatory quarantine period for such persons.

An owner’s risk plan should also identify preventative steps and proactively identify potential cases of coronavirus. For example, owner personnel should be aware of the list of COVID‑19 symptoms (e.g., posting COVID‑19 signage in offices and other work sites)[1], and all personnel should be required to immediately report any such symptoms. Owners should also consider encouraging personnel experiencing symptoms of illness to stay home or otherwise refrain from reporting to the workplace, including providing paid sick time under appropriate circumstances.

In addition to health mitigation techniques, an owner should also plan in advance for potential economic disruptions. This includes making necessary preparations so that owner personnel can work remotely in the event that such personnel exhibit COVID‑19 symptoms as well as establishing protocols to temporarily close non‑essential offices. Such preparations might include providing laptops to additional employees to increase remote work capabilities, installing necessary programs and software on all work laptop computers (e.g., CAD software or Primavera scheduling software), setting up filesharing sites, implementing WebEx or other tele‑meeting capabilities, and permitting personnel to log into the owner’s systems by remote access VPN. With such measures in place, infected or quarantined personnel may continue progressing the project remotely, even during a quarantine scenario.

Have the Contractor Manage Potential Impacts

A central piece of an owner’s coronavirus mitigation strategy should be to have the contractor take proactive steps to prevent and manage potential impacts on the project. This means reviewing the engineering, procurement and construction agreement (“EPC”) or construction agreement to identify provisions requiring the contractor or supplier to mitigate impacts related to the coronavirus, assessing whether contractor has established adequate mitigation measures, and notifying contractor of any additional steps it should be taking. An owner should consider taking these steps regardless of the party who bears the responsibility for impacts that may be caused by coronavirus. A good starting point would be for an owner to consider how certain contractual issues—such as equipment and material procurement, HSSE practices, and notice and mitigation requirements—may apply to potential coronavirus impacts.

Supply of Equipment and Materials

Under the EPC or construction contract, the contractor will generally be responsible for supplying equipment and materials necessary for the project. Disruption of global supply chains due to coronavirus, however, may cause delays to the supply of equipment and materials procured from certain source countries and may impede contractor’s (or its subcontractors’, suppliers’, or vendors’) ability to timely supply such equipment and materials. To prevent supply issues, an owner should consider contacting the contractor to make sure that it has an alternative sourcing plan (including a list of back-up sourcing options) to procure the same or sufficiently similar equipment and materials from sources acceptable to the owner.

Health, Safety, Security, and Environmental (HSSE) Measures

Another key step is to ensure that the contractor is performing the work in accordance with its HSSE policies, the owner’s HSSE policies, or both (as applicable). For an owner, this means dusting off the contractor’s HSSE plan (or, if not provided as part of the contract, requesting such a plan from the contractor), identifying those HSSE provisions applicable to the health and safety of all personnel and safety at the project site (and other locations work is performed), and ensuring that contractor has mechanisms in place to comply with such HSSE provisions.

Most HSSE plans require the contractor to establish HSSE measures that are specific to the project and the site. Accordingly, an owner should seek to have the contractor establish site‑specific best practices to prevent the spread of coronavirus to the project. Such practices, may include, for example[2]:

  • updating the contractor’s emergency operations plan with the help of the local public health department, emergency operations coordinator or planning team, and other relevant partners to include COVID-19 planning;
  • screening personnel for signs of a coronavirus infection;
  • identifying and allocating space on the project site that can be used to evaluate sick personnel;
  • developing an emergency communication plan for distributing timely and accurate information to on-site personnel;
  • promoting the practice of everyday preventative actions among on‑site personnel (including frequent hand washing with soap and water, cleaning frequently touched objects and surfaces, and requiring personnel to stay home when sick);
  • providing COVID-19 prevention supplies on the project site (e.g., disposable gloves, soap, hand sanitizer that contains at least 60% alcohol, tissues, trash baskets, and disposable facemasks in case someone becomes sick while on-site) and setting up sanitation stations on the site; and
  • planning for personnel absences by developing flexible attendance and sick-leave policies, developing and implementing a plan for alternative labor to make up for any such absences, and monitor and track COVID-19 related personnel absences.

The contractor should also consider employing the same steps for its project team that the owner employs for the owner team, as outlined above (i.e., managing the travel of all personnel; proactively identifying potential cases of COVID‑19 infection; posting signage in work sites; making preparations for offsite personnel to work remotely; etc.).

Compliance with Notice and Mitigation Requirements

Another important preparation strategy for an owner is to review the EPC or construction contract and to identify those provisions requiring the contractor to mitigate against or provide notice of potential project impacts due to coronavirus. Some typical provisions would include, for example, providing regular progress reports that identify such impacts on the project, mitigating against force majeure events, and complying with applicable laws and regulations.

To keep abreast of any potential coronavirus risk to the project, owners should request that the contractor provide both regular updates and immediate notice of any potential coronavirus impacts to the project. As a matter of course, the contractor should specify in each progress report any potential coronavirus impacts on the project (whether occurring at the project site or elsewhere around the world—for instance, the disruption of a particular supply chain in a foreign country). In addition, the contractor should provide immediate notice of any potential coronavirus infections affecting the project (e.g., providing same‑day notice of any personnel exhibiting COVID‑19 symptoms and identifying any quarantine actions taken for such personnel).

In order to effect Contractor’s mitigation obligations, owners should request that the contractor describe back‑up plans for such impacts. For example, if the supply chain for certain materials in a source country has been disrupted, the contractor should be prepared to timely procure such materials from alternative sources agreeable to the owner to prevent potential delays to the project schedule. Or, if the rapid spread of the virus decreases the availability of healthy laborers, the contractor should be prepared to turn to alternative labor sources that have been identified in advance. Knowing these “Plan B” options upfront will benefit both the owner and the contractor in minimizing impacts to the project, will head‑off claims of force majeure (if allowed under the applicable contract), and will ultimately reduce the risk of cost and schedule overruns.

Just as importantly, owners should inquire as to how the contractor will comply with any recent COVID‑19 related laws and regulations applicable to the project. This could include, for example, describing how the contractor will update its HSSE practices to account for any local, state, or federal regulations imposing on-site COVID‑19 prevention measures.

Consider Contacting Lenders and Insurance Brokers

In addition to shoring up its own internal mitigation efforts and those of the contractor, an owner should also consider contacting its lender (if any) and insurance broker to get ahead of any potential COVID‑19 impacts. An owner is well served to update and work with its lender, as an informed lender will want to work collaboratively through potential COVID‑19 issues.

An owner should promptly and proactively evaluate its potential insurance coverage for impacts to the project caused by coronavirus and should take steps to ensure compliance with any policy conditions, such as providing notice to and cooperating with potentially responsive insurers. Personal injury claims arising from the sickness of an individual may be covered by worker’s compensation, employer’s liability, and/or general liability policies. Project delays and associated loss of business income may be covered by the owner’s property, business interruption, delay in start-up, and/or contingent business interruption coverages. For example, many such policies cover losses sustained when a “civil authority” limits or prohibits access to the project premises and/or to a supplier’s premises.

In addition, actual or perceived exposure of the premises to an individual who has contracted COVID-19 may fall within the policies’ grants of coverage for “physical loss of or damage to insured property.” It is important to work with your insurance brokers to avoid missing any deadlines and to avoid any missteps on compliance with policy requirements. Experienced coverage counsel also is critical to evaluating potential sources of insurance coverage and maximizing recovery.

Disrupting the Disruptor

As exemplified by the coronavirus, project teams in today’s environment should take a more wholistic and proactive approach to safety planning that includes the risk of disruption due to infectious diseases. Owners should work collaboratively with contractors (and others, such as lenders and brokers) to develop a multi‑faceted, front‑end approach to handling such risk. With some preparation and planning, owners can disrupt the potential disruption of coronavirus and other infectious diseases on their projects.

Tips for Managing a Construction Project During Coronavirus

Stacy Bercun Bohm | Akerman

Below are some measures a project owner may want to consider to address coronavirus related issues and the impact it may have on an owner’s ongoing construction project. Because the response to the coronavirus in the U.S. and around the world seems to be accelerating and changing daily, and because most construction contracts force majeure clauses will likely include delay and disruption due to the coronavirus as an excusable delay, below are some proactive measures an owner can implement in the event their project is impacted:

  1. Check the force majeure clauses of your contracts on all open projects. While it is unlikely that they specifically reference an epidemic, a lot of them are probably vague enough to cover a labor or supply disruption due to an unforeseen act, and would almost definitely do so in the event of a government shutdown. If you have any doubts, contact your construction counsel for guidance.
  2. Request that your contractor provide you with any anticipated project disruption due to the coronavirus, including supply chain delays from materials coming out of China or elsewhere, or a mandatory quarantine that affects your contractor’s workforce, and request that you be immediately notified of the potential schedule impact even if the impact is undetermined. This would include productivity decreases due to workforce absenteeism related to the virus.
  3. Review your contract to see how it addresses escalation in material costs and the party responsible.
  4. Review your insurance policies for the project to determine if there would be any coverage for a disruption. This would most likely be found in a builder’s risk policy or an owner’s loss of use policy. For any new projects where builder’s risk coverage has not yet been bound confirm the policy will cover this type of epidemic and the losses resulting from same.
  5. Start talking to your project participants (construction and design team) now about everyone’s expectations for managing the disruption. Proactively review all applicable insurance coverage and talk to your lenders about what will happen in the event of a disruption.
  6. Create a demobilization plan and remobilization plan in the event of a suspension or a government ordered shutdown.
  7. Review your recorded Notice of Commencement to determine if it needs to be extended and proactively extend it now if necessary.
  8. Encourage people that are sick to stay home. Request that the contractor host a meeting for its subcontractors regarding safety expectations. The contractor should provide a plan of action that provides measures it is taking to prevent the spread of the virus – handwashing, avoiding contact with sick people, etc. Consider whether more extreme measures like actively screening people at the jobsite for signs of illness make sense. Encourage anyone showing symptoms of the virus to seek medical care. Make sure you are documenting all requests to your contractor and measures the owner is taking to prevent the spread at your project and to help mitigate any delay. In the event of a disputed claim with the contractor, that documentation may be helpful.
  9. Consider creating a separate folder or file for each project in which you can file anything related to coronavirus claims, impacts, warnings, etc.