Managing COVID-19’s Impact On Construction Projects: Delay, Work Stoppage, Suspension And Termination

Buchanan Ingersoll & Rooney

The novel coronavirus (COVID-19) pandemic has and will continue to have profound effects on the development and construction industries. There have been and will continue to be substantial delays and cost impacts as a result of disruption to supply chains, the unavailability of workers and financial impacts disrupting payment. In addition, many states, including Pennsylvania, have now issued orders directing non-essential businesses to cease operations and individuals to stay at home. For developer/owners, it is imperative that you understand how your contracts allocate the risk of delays and shut downs, as well as your and the contractors’ options regarding the suspension or termination of the work.

Delay, suspension and termination each present separate scenarios with different effects and legal obligations and consequences. Moreover, who suspends or terminates the work – the owner, contractor, or government – and under what circumstances and pursuant to which contract provision, also implicate different rights and obligations.

Delay. Even in those locales where the state or local government have not issued stop-work or stay-at-home orders, the Covid-19 pandemic is likely to disrupt and delay construction. In normal times, and depending on the cause and extent of the delay, the result may be that the contractor is entitled to an extension of time and/or delay damages, or the contractor faces liability to the owner for liquidated or actual damages if the delay is not recovered and the project does not complete on time.

Entitlement to compensation (delay damages) is dependent upon the contractual allocation of risk and whether the delay is “excusable” or “inexcusable” and “compensable” or “noncompensable.”

  • Excusable delays are those that are caused by factors beyond the control of both the owner and the contractor; examples include weather, acts of God and strikes. In cases of excusable delays, the contractor is entitled to an extension of time but no additional compensation.
  • Inexcusable delays are delays caused by or for which the contractor is responsible. Inexcusable delays do not entitle the contractor to an extension of time or additional compensation, and may expose it to liability to the owner for actual or liquidated damages.
  • A compensable delay is any delay to the project caused by the owner and/or its agents (i.e., the architect). In cases of compensable delay, the contractor is typically entitled to both a time extension and additional compensation for damages such as extended overhead and job site costs, equipment standby costs, wage escalation and extended supervision.

“Force Majeure.” A force majeure event is one that is outside the control of a party and prevents it from performing its contractual obligations. While many contracts include “force majeure” clauses, the specific language and, as a result, the applicability to particular events or circumstances can vary. The consequence of invoking the clause can also vary.

Some contracts, most notably the AIA documents, do not use the term at all, and “force majeure” events are simply treated as excusable delays. Section 8.3.1 of the A201 General Conditions simply includes “labor disputes, unavoidable delays in deliveries, adverse weather conditions, or ‘other causes beyond the contractor’s control'” among those delays for which the contractor is entitled to an extension of time. Whether the contractor is also entitled to additional compensation is dependent upon the often revised language of §8.3.3 and, most notably, the inclusion or absence of a “no damages for delay” clause.

Other contracts provide separate express ”force majeure” provisions, which detail the timing and content of the required notice, and allow for varying degrees of relief – from suspension of the work during the event and a corresponding extension of time, to compensation for costs incurred to address the event itself, to “delay damages” such as extended overhead and general conditions.

Government-Ordered Work Stoppages. While gthe overnment’s orders expressly or effectively stopping the work may be considered a “force majeure” event under some contracts, other contracts separately address such orders and provide for particular procedures, rights and obligations. For example, §14.1.1 of the AIA 201 General Conditions provides that the contractor may terminate the contract if the work is stopped for more than 30 consecutive days as a result of the issuance of an order of court or other public authority, or by act of government such as a declaration of a national emergency. Section 14.1.3 further provides that if the contractor exercises its right to terminate under §14.1.1, it is entitled to be paid for work performed, costs incurred as a result of the termination, plus overhead and profit on the work not executed (i.e., the remaining contract work).

Suspension of Work. Virtually all construction contracts give the owner the right to suspend the work for its convenience for as long a period as it deems necessary. While this right is often subject to the contractor’s right to terminate if suspension of the work, in the aggregate, totals a specified number of work days within a specified calendar period, it may allow the owner to preclude the contractor from terminating in response to an extended delay, such as a government stop-work order; at least for a period of time. In some circumstances, suspension may provide a measure of protection against otherwise recoverable delay costs such as extended general conditions, overhead and stand-by costs, as during the period of suspension the contractor (theoretically) may take action to mitigate its overhead and stand-by costs. Suspension does not come without cost, however, as the contractor will typically be entitled to an equitable adjustment to the contract to account for any increases in the cost of the work in the interim (e.g., labor and material cost escalation), possibly including adjustments to profit and overhead. When considering suspension in the event of a government-ordered work stoppage or force majeure event, owners must carefully review and compare the contractor’s rights and entitlement to compensation under the respective scenarios.

Termination for Convenience. While the contractor may have the right to terminate the contract as a result of an extended delay or shut down due to government action or owner suspension, the owner typically maintains the right to terminate the contract for its convenience – meaning at any time and for no reason. In addition, the compensation to which the contractor is entitled in the case of termination for convenience may differ from that to which it is entitled if the contractor were to exercise its right to termination.

Termination for convenience clauses often favor the owner and expressly provide that the contractor is entitled only to be paid for work performed prior to termination and reimbursement for “termination costs,” which may be agreed to up front and liquidated in the form of a specified “termination fee.” There are several caveats of which owners considering termination for convenience must be aware, however, such as the effect on any bonds and insurance, and whether the subcontracts are assignable in such circumstance.

Conclusion. These are unprecedented times the decision whether to ride out a work stoppage, declare a suspension or even terminate the contract is made more complicated by the uncertainty as to what the commercial and practical options to complete the project will look like once the work is able to resume. No one knows how long the current crisis will last, which companies and projects will ultimately survive and what the marketplace will look like on the other side. To best navigate these troubled waters, owners must first understand their options under the contracts for construction and the associated costs and potential consequences.

What to Do When a Worker on Your Construction Site is Diagnosed with Coronavirus

Daniel Miktus and Stacy Bercun Bohm | Akerman

As the country scrambles to address the ongoing coronavirus (COVID-19) pandemic, Governors and local officials have enacted emergency orders requiring individuals to stay in their homes except for certain essential activities, and ordering “non-essential” businesses to shut down. Nearly all of these orders exempt or except the construction industry and its employees from these shutdown and stay-at-home measures. In the midst of all of this, on March 26, 2020, a homebuilding company shut down its own construction site after two workers at the project tested positive for coronavirus.[1]

In light of this, Project owners, contractors, subcontractors, and consultants need to review their processes and procedures for protecting their project sites from infectious disease, including coronavirus. These parties also need to consider and plan for a situation where onsite workers are diagnosed with coronavirus. Project participants should consider these recommendations for protecting their project sites and preparing for a possible outbreak onsite.

Protecting the Project Site Before an Outbreak

  1. Ensure that all individuals onsite are aware of and are following all available health and safety guidance available from sources such as the Centers for Disease Control and Prevention (CDC)[2], the Associated Builders and Contractors[3], the Associated General Contractors of America[4], the National Association of Home Builders[5], and OSHA.[6] This guidance includes staying home when you are sick, isolating infected individuals, washing hands or using hand sanitizer frequently, cleaning equipment and the worksite regularly, and following social distancing guidelines. Consider having a superintendent or safety manager specifically observe workers onsite to ensure all guidance is followed.
  2. Clean your project site regularly. This includes disinfecting frequently-used surfaces, tools, and equipment at least on a daily basis, and minimizing sharing of tools and related hand-held devices. It also means having your project site properly ventilated.
  3. Limit the number of workers onsite at any given time to only those necessary to maintain the project schedule. Consider ways to adjust the project schedule to take into account the need for social distancing, including having working teams onsite at different times.
  4. Review your contract now. Get familiar with provisions of your contract relating to delay, cost increases, force majeure, labor or material supply disruptions, emergencies, insurance, and termination. The AIA A-201 (2007 and 2017) General Conditions of the Contract for Construction contemplates the existence of an “emergency” and infers that the contractor may be entitled to additional compensation or an extension of time in the event of an “emergency.” The same recommendation applies to insurance policies, loan agreements, and joint venture agreements. Determine whether any applicable insurance policies may provide business interruption insurance, and whether any other policies – specifically builders’ risk – would cover costs arising from an outbreak of coronavirus, including the cost to sanitize the project site. Understand your rights and obligations now, so that you can better form an action plan. Do not wait until an outbreak occurs.
  5. Consider preparing notices in advance. This includes letters notifying all parties of a shutdown (including a suspension or termination, if necessary), notifying workers that they may have been exposed to the virus, and notifying an insurer or lender of a potential claim or impact.
  6. Form a plan and course of action for what your organization will do in the event an onsite worker is diagnosed with coronavirus. Answer questions such as who has the responsibility for which obligations within your organization, what steps need to occur before the site will reopen, which parties need to receive notices, and what would a shutdown mean for your continuing ability to complete the project.

What to do when an Onsite Worker is Diagnosed with Coronavirus

  1. Isolate the worker and any person who worked in close proximity to the infected individual, and ensure implementation of appropriate quarantine arrangements. Evaluate the potential need to shut down the site immediately under applicable guidelines and local health department or similar governmental mandates from the CDC and local health department or similar governmental mandates, as well as send any communications to co-workers that are necessary regarding possible exposure to the infected employee. Construction sites involve many individuals frequently working closely together and touching the same surfaces, tools, and equipment. If one worker is diagnosed with coronavirus, there is a probability that others may have been infected as well. Identify further measures needed to maintain a safe workplace, including the possible suspension of all non-essential site activity.
  2. Hire a professional cleaner to sanitize affected areas of the project site, and ensure that the cleaner is familiar with and complying with any guidelines or requirements from CDC or other parties, including any governmental health or safety agencies with jurisdiction over the project.
  3. Consider engaging with any governmental health or safety agencies with jurisdiction over the project. Ask for their advice, safety/health requirements, and any available financial or other assistance.
  4. Provide notices to any applicable party, including for delay, additional costs, suspension, or termination. To the extent you have not already, review your insurance policies, and provide any notices of claim. Also review your loan agreement and determine whether any steps are needed with respect to your lender or other project stakeholders.
  5. Work with your contractor, subcontractors, consultants, and suppliers to determine the best methods to adjust and mitigate damages. Most project participants will be in a similar situation at this point: delayed, potentially out of work, and possibly not getting paid. Form a prudent and reasonable plan to get back on track and salvage the project. Work with these parties to learn from the past and institute additional steps to prevent further outbreaks.

[1] Construction site shut down after workers test positive for coronavirus, South Florida Business Journal (March 26, 2020), available at https://www.bizjournals.com/southflorida/news/2020/03/26/construction-site-shut-down-after-workers-contract.html.

[2] https://www.cdc.gov/coronavirus/2019-ncov/index.html.

[3] https://abc.org/coronavirus.

[4] https://www.agc.org/coronavirus-covid-19.

[5] https://www.nahb.org/Advocacy/Industry-Issues/Emergency-Preparedness-and-Response/Coronavirus-Preparedness/Protect-Your-Business/Construction-Jobsite-Safety-Recommendations?_ga=2.251995660.448258268.1585162298-2032246404.1584720737.

[6] https://www.osha.gov/SLTC/covid-19/.

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.