The Impact of COVID-19 on Construction and Infrastructure Projects: An On-Site Perspective

Jennifer Permesly | Skadden Arps Slate Meagher & Flom

On January 14, 2021, Skadden and BDO Consulting co-hosted a webinar discussing the impacts of COVID-19 on complex construction projects. The program was based in part on the perspectives of owners and contractors surveyed by Skadden and BDO with direct experience addressing the impacts of COVID-19 on their projects. The panelists included Jennifer Permesly, a partner in Skadden’s International Litigation and Arbitration Group; Matt Stamp, a senior manager in BDO’s Construction and Environmental Solutions practice; and Wiley Wright, the leader of BDO’s Construction and Environmental Solutions practice. The discussion was moderated by Bryan Bellack, managing director of BDO’s Forensic Investigation and Litigation Services practice.

The panel began by discussing the various ways in which construction projects have been impacted during the pandemic, including: (i) government-mandated shutdown periods; (ii) new safety requirements and protocols, including PPE, reductions in work crews, limitations on work hours and closed/restricted site access; (iii) supply chain interruptions; (iv) delays in permitting and other government agency responses; (v) labor restrictions, labor shortages and travel restrictions impeding the ability of laborers to get to worksites; and (vi) difficulties associated with teleworking in a live construction environment. The impacts on construction projects may include, among others, delays in the as-built schedule, changes in productivity, escalating labor and material costs, and increased overhead. The webinar provided examples of how owners and contractors have attempted to calculate the impact of these changes on their projects.

The legal ramifications of the pandemic are still playing out and likely will not be resolved for some time. Anecdotal evidence suggests that force majeure provisions rarely have been invoked in connection with construction projects and, where invoked, have been limited to the period of mandated government shutdown and/or direct supply unavailability resulting from the pandemic. The infrequent use of such clauses may be due to the fact that force majeure obligations in construction contracts typically extend the time for project completion (which owners do not favor) and require each party to bear its own costs during the force majeure event (which contractors do not favor).

Commentary from the companies surveyed suggested that owners and contractors generally have been able to agree on limited time extensions to provide some pandemic-related relief, but whether these extensions will be sufficient given the ongoing conditions and whether parties can agree to further extensions remains unclear. As disputes arise over the sufficiency of extensions, those charged with resolving them will need to grapple with, among other things, whether contractors should be required to mitigate consequences for owners or accelerate work plans to compensate for lost time; whether there is an obligation to use contract “float” to compensate pandemic effects; and whether the causes of project delays are linked to the pandemic, as opposed to other construction or supply issues, among other issues.

The experience of those surveyed also suggests that no agreement has yet been reached as to who will bear the costs of productivity impacts on construction projects. Clear and robust documentation segregating productivity effects that can be linked to the pandemic from other, nonpandemic ones will be critical in establishing entitlement. Early planning also is critical in the context of construction disputes, in order to ensure a robust legal record in the event of a subsequent dispute.

In addition to COVID-19’s ongoing impacts on current construction projects, the pandemic already is affecting contract negotiations going forward. Owners may be willing in new construction and equipment supply contracts to provide schedule and, on occasion, cost relief for COVID impacts directly resulting from a legal requirement. The issues debated in the contract negotiation are related to whether such relief extends to COVID-related issues that are not the result of a legal requirement, such as supply chain issues or labor shortages. The owners’ general position is that we are now far enough into the pandemic that supply chain and labor issues have been less problematic and contractors should be able to price in their risk. Owners and/or lenders also may ask contractors for transparency regarding impacts to date and planning for ones going forward. Contractors, on the other hand, are pressing for schedule relief and, if possible, provisions to address other unanticipated impacts as well. If unsuccessful, they may try to increase lump sum or unit-based costs to reflect the added pandemic uncertainties.

COVID-izing Your Construction Contract

Frederick E. Hedberg | Construction Executive

The global COVID-19 pandemic has changed the world forever, disrupting many industries, as well as creating unprecedented challenges that threaten many businesses. The construction industry is no different. Projects throughout the country have been adversely affected by unplanned work stoppages, delays, disruptions to the supply chain, price escalations and other unanticipated events. 

It is critical that owners, developers, contractors and suppliers learn from their experiences over the past year and account for the COVID-19 pandemic when drafting and negotiating contracts for their projects.

First and foremost, parties should clearly define their rights and responsibilities to properly manage risks due to COVID-19 and its impacts. COVID-19 and other key related terms should be defined, relying on the CDC and state governments for guidance, to eliminate any uncertainties. The contract should also identify executive orders, guidelines and regulations that have been issued concerning COVID-19 by states, municipalities and other authorities that have jurisdiction where the project is located. 

The parties should define whether impacts concerning COVID-19 or COVID-19 ordinances give rise to a claim under the contract and, if so, whether the contractor is entitled to compensation for additional costs and time, to an extension of time only, or neither.

When the construction industry began to feel COVID-19’s effects earlier this year, parties considered whether their contracts contained a force majeure-type provision, and whether COVID-19 constituted a force majeure event. Such a provision excuses a party from performance of the contract as a result of its inability to perform arising directly from an event outside the control of either party, and which was unforeseeable at the time the parties entered into the contract. 

In determining whether such a provision is applicable, parties should consider: 

  • the specific language of such a provision (e.g., does it include epidemic or pandemic, public health or other state of emergency); 
  • the foreseeability of the event; 
  • the direct correlation between the event and its impact on performance; and 
  • the frustration of performance due to the significance of the event. 

The intent of a force majeure provision is that neither party should be responsible for additional costs of conditions deemed beyond the control of the parties. Standard contractual provisions, such as section 8.3.1 of AIA 201-2017, section 6.3 of ConsensusDocs 200-2019, and section 52.249-14 of Federal Acquisition Regulation for federal contracts, contain delay clauses that provide for excusable, non-compensable extensions of time. Notably, the AIA does not specifically address pandemics; ConsensusDocs states that epidemics and quarantines are excusable delays.

Now that COVID-19 is known, and government officials, industry organizations and regulatory bodies have issued guidance and protocols, contracts should contain force majeure provisions that include COVID-19 as such an event and allow contractor recovery for unplanned work stoppages, delays, supply chain disruptions, price escalations and other specific unanticipated events. 

Otherwise, contractors must include these unknown impacts in their contract price and schedules—resulting in increased costs and less reliable schedules—or account for them by using allowances and stating assumptions and clarifications upon which the price and schedule are based.

Other important provisions to consider when negotiating construction contracts include change in law, suspension and termination, and health and safety. Parties should consider whether change-in-law definitions are sufficiently broad to capture COVID-19-related guidance and protocols. For instance, section 3.21.1 of ConsensusDocs 200-2019 allows for equitable adjustments to contract price and time for changes in the law after the date of the contract; whereas, section 3.6 of AIA A201-2017 limits a contractor’s recovery.

COVID-19 caused parties to suspend work, and even terminate contracts. Consequently, owners must ensure contracts allow them to suspend work for convenience due to COVID-19 health concerns, even if COVID-19 orders allow the contractor to proceed. Parties now must consider termination clauses in light of COVID-19. 

The standard ConsensusDocs clause allows for termination after 30 days of work stoppage and for reasons beyond the owner’s suspension (such as court or other government orders or because materials are unavailable through no fault of the contractor). The standard AIA clause, however, does not allow for termination unless repeated owner suspensions of the work constitute in the aggregate more than 100% of the total number of delays scheduled for completion, or 120 or more days in any 365-day period, whichever is less.

Parties should also consider jobsite safety and health compliance in their contracts. In addition to satisfying obligations under OSHA’s General Duty Clause (section 5(a)(1) of the Occupational Safety and Health Act of 1970, 29 USC 654(a)(1), contractors must now follow recommendations and practices of the CDC and HHS, along with adopting and implementing safety regulations issued by governmental agencies affecting site access and operations such as mandatory reporting requirements, jobsite screening, sanitizing and cleansing guidelines, employee training and contact tracing. Parties should define these duties, and contractors should account for additional costs necessary for compliance.

Because the construction industry is an essential business, parties should carefully negotiate key contractual provisions to properly manage their risks due to COVID-19, and to lessen the potential of future delays and disputes that could have detrimental effects on their projects and their businesses.  

3 Ways COVID-19 Will Continue to Impact Insurance Industry in 2021

Insurance Journal

The effects of the COVID-19 pandemic will be felt by the insurance industry and its customers well into 2021 as consumers and businesses continue to face economic challenges, according to a new survey by consumer credit reporting firm TransUnion.

Insurance customers will also expect insurers to offer digital tools that make it easier to conduct business.

“The unpredictable environment that lies ahead indicates consumers and businesses will increasingly rely on and choose insurers offering online resources and tools that can best meet their needs, particularly as digital adoption continues to grow,” said Mark McElroy, executive vice president and head of TransUnion’s insurance business.

TransUnion conducted the survey of 3,148 U.S. consumers with active auto, homeowners, renters and/or life insurance policies during the first week of December. In their analysis of the findings, TransUnion researchers identified several trends they believe the insurance industry can expect to see play out during 2021.

Three Trends to Watch

Trend #1: The financial and economic challenges brought forth by COVID-19 will continue to impact consumers and businesses, potentially leading to profitability impacts for insurance carriers down the road.

Looking at the next three months ahead, TransUnion’s consumer survey indicates respondents are primarily concerned about being able to pay for their auto insurance bill (44%), followed by their car payment (26%), mortgage payment (23%) and life insurance bill (22%).

A recent TransUnion analysis also noted an increase in the distribution of higher risk auto insurance shoppers as well as those with payment accommodations in 2020. Factors such as rising unemployment and varying financial impacts may be contributing to this trend, and it will be imperative for insurers to be able to identify which customers are facing COVID-19 hardship to strengthen engagement.

Within the commercial automotive space, TransUnion has observed that many insurers are experiencing relative stability in underwriting performance in the short-term resulting from fewer claims on less congested roads and less miles driven, among other confluent factors. As the broader environment begins to normalize, insurers will again need to implement strategies that help them increase segmentation and remain competitive in the wake of COVID-19.

Trend #2: Consumers and businesses expect insurers to have a greater understanding of their individualized needs in light of shifting behaviors and preferences.

For respondents who own or lease a car (90%), TransUnion’s survey indicated that 72% used their vehicle less in the time since COVID-19 was named a global pandemic or don’t use their vehicle anymore. Given this drop, there may be greater consumer interest in usage-based insurance and telematics programs. The survey found 61% of drivers would allow their insurance carrier to collect real-time information about their mileage and driving habits if it could lower their premium.

Looking at the commercial and personal property space, respondents expressed a strong preference for at-home settings when asked to choose their preferred work environment for 2021 – 37% of respondents cited a preference to work at-home, and 31% preferred a hybrid of working in-person and at-home, with more time spent working from home. These findings may signal less demand for commercial real estate as well as broader shifts within the commercial and personal space as employers extend work-from-home policies or adopt hybrid work environments to best address employee needs and operational demands.

Trend #3: Insurance digitization efforts will continue to strengthen in 2021.

Digital adoption in the insurance industry grew 20% globally in the past year. This transformation is taking place across the insurance policy lifecycle, from marketing to claims submissions to digital policy servicing. TransUnion’s survey found that almost half of respondents (47%) filed an auto and/or property claim in the last year, and of those, nearly four in 10 (39%) used a mobile app, website portal or e-mail.

Consumer preferences for interacting via digital/online platforms also support this trend. The survey found respondents preferred to communicate with an insurance provider primarily via e-mail (32%) and telephone calls (32%), followed by an insurer mobile app or website portal (18%). As digitization grows, insurers must balance introducing and expanding digital customer interactions while also delivering friction-right experiences and protecting against fraud.

The Altered Landscape of Mediation

Rebekah Ratliff | The CLM

COVID-19 is driving change. Why some of it may be here to stay

As claims professionals, we start the dispute-resolution process by adjusting losses. We consider the insurance policy contract as well as state and federal laws when making decisions on what is owed and all factors that influence settlement. The claims process can end by settlement in negotiations, ADR, or trial.

With COVID-19 persisting, all processes are under examination and reconsideration for how resolution may be achieved. Assessing the possibilities under new constraints is an evolving task. The “how” of protecting the sanctity of the confidential mediation process has been under scrutiny since it became apparent that virtual mediations, in some form, are here to stay. And while concerns still seem to outweigh the benefits, the results are almost identical to in-person hearings. There are some considerations that I can share from the perspectives of a former commercial adjuster and a mediator.

With regards to observation, the ability to see and monitor behaviors is not the same virtually. As a matter of fact, it is virtually (pun intended) impossible to adequately proctor the mediation environment as the adjuster and as the mediator. In-person mediation hearings allow for a “read” of the room on the part of the adjuster, a valuable advantage when assessing the case up close, especially if trial is imminent. If the plaintiff has claimed certain disabilities and inabilities, a good look at her at the mediation table may shed some light on if truth or fiction is being peddled. The parties get their stories told “in color” versus black and white. An adjuster has the opportunity to consider any previous unknowns that may change her evaluation, up or down.

Additionally, plaintiffs want their “moment in the sun.” In some cases, it is the story-time sharing in the joint session opening statements. The plaintiff may feel that moment is diminished a little by an abbreviated online mediation process, especially if the case does not settle. Also, the apology that often starts the healing process is more heartfelt in person. Although an online apology is still an apology, there is something about being there to look eye to eye when those important words are said.

From my viewpoint, the biggest benefit of in-person mediations is the human touch—the ability and skill in discerning the human condition distinguishes a talented dispute resolution professional from the common-variety colleague. I have been able to influence communications and concessions by just bringing my humanness into the room. The power of authentic interpersonal connection is difficult to replicate virtually. The tenet of trust for a mediator is a make-or-break skill.

Of course, COVID-19 has caused us to reimagine mediation in the interest of public safety. The process requires more work, but it has its benefits. Mediation is a great option given the indefinitely delayed trial calendars and backlogged caseloads. It is also a golden opportunity for parties to take matters into their own hands and not leave the fate of their cases in the hands of six or 12 strangers. Mediation participants can attend from virtually anywhere, and parties who suffer from disabilities can participate from the comfort of their own homes without having to deal with travel or traffic. This arguably puts them in a better state of mind for the mediation process.

Overcoming Challenges

Pre-hearing agreements need to stipulate that recording the hearing is prohibited. It has been suggested that the parties be asked to verbally confirm they are in a private, secure location on the day of virtual mediation and notify the mediator of any changes. The truth is, in person you could not guarantee that participants were in compliance with the no-recording policy. No one was checking under the table for cellphone recording noncompliance.

Managing the virtual platforms can be challenging from a tech perspective and from the host’s perspective. For example, it’s important to let everyone in from the waiting room simultaneously so that no one party feels slighted. This and other issues are being examined to determine how to efficiently run mediation hearings without breaching confidentiality. Zoom worked out the “bombing” issues that were taking place in early 2020, and it’s now best practice to “lock” the meeting. Be aware that using a third party to manage technology is a confidentiality breach that could cause evidentiary exclusion issues regarding ADR communications and potentially jeopardize subsequent hearing exemptions that a mediator usually enjoys.

There are various scenarios for attendance at online mediations. Clients may attend the hearing in person, in their lawyer’s office, in the same building but a different room, or from a different laptop. We have had to get creative with the sharing and signing of documents (thank goodness for Dropbox and DocuSign).

Not every case is appropriate for a virtual environment, so hybrid hearings are under consideration. It is interesting that, while the bedrock of mediation is compromise, when the process itself requires recalibration and reconsideration, it can be difficult for everyone to make concessions. The reality of not knowing what the new normal will look like raises the question: How will the future of ADR look when the vaccine settles? One thing is for sure, the future of mediation is compromised. 

Post-Covid Projects “Restarts”: Contractors Caught Between A Rock & A Hard Place?

Robert Fryman | Moritt Hock & Hamroff

Even after New York Governor Andrew M. Cuomo’s New York “PAUSE” program was replaced by the New York “FORWARD” program and its related executive orders (permitting both essential and non-essential projects to resume), many public and private improvement construction projects remained suspended.  Now, more than six months after implementation of the New York Forward program, many public improvement and private improvement projects are belatedly coming back “online” with a vengeance!

Many owners and construction managers on these long-suspended projects are now ordering the immediate resumption of project activities and demanding “recovery schedules” from their contractors. Contractors then demand the same from their subcontractors, all notwithstanding the fact that many of these owners previously indicated they would entertain Covid-related claims arising from project shutdowns. This has left many contractors and subcontractors feeling as if they are caught between a rock and a hard place.  They must respond to demands to immediately resume project activities, and, in many cases, provide recovery schedules indicating how they would make up several months’ worth of Covid and post-Covid owner-caused delay.

Even after the New York FORWARD program allowed projects to resume in phases throughout the state, many projects remained shut down due to the economic concerns of the project owners.  Many public owners concerned about their budgets post-Covid, and private owners concerned about the financing and ultimate economic usefulness/success of their project, kept their projects shuttered while they considered how best, or whether, to move forward.

In turn, many contractors, experiencing huge gaps in work due to the extended shutdown of these projects, economic pressures facing their own businesses, and the uncertainty as to when or if these paused projects might resume, took on other contracts or began work on projects that were moving forward, and now face labor, equipment and material shortages conflicting with requests to immediately restart.  Others are simply daunted by the potential costs of the restart and recovery schedule efforts and the task of preserving their rights and remedies under their contracts in these extraordinary pandemic circumstances in the face of the pressure from owners, CM’s and/or GC’s to immediately resume work and to recover the lost schedule time.

LEGAL “TRIAGE” IN THE COVID-19 ERA

Given the proliferation of notice and condition precedent provisions in public and private construction contracts it is more important than ever to comply with your contract’s requirements in order to preserve your rights and remedies to pursue claims for additional costs, delay, and/or other forms of relief, such as termination for owner breach.

As we often advise, paramount to this effort is to read and know your contract, including the provisions of the prime contract if those are “flowed down” to you by your contract. Moreover, in light of the typically short time frames for providing notice of claim, and thereafter, in certain instances, documenting the categories of damages arising from such claim, it is crucial and time-sensitive for you to focus on providing the contractually required notices, sometimes even before you can begin to quantify and/or determine the merits of the underlying claim, so as to preserve your rights to pursue these claims later.

All public and most private construction contracts contain notice and damage documentation requirements.  These provisions are not optional and are strictly enforced. Compliance with notice provisions is essential to preserving all your potential claims (e.g., delay, extra work and/or disputed work) and your ability to collect actual, increased costs during dispute resolution, project close out process and/or litigation.

NEED TO ACT NOW TO PRESERVE POTENTIAL CLAIMS FOR LATER

The following are some examples of notice and damage documentation requirements in contracts.  These examples are not exhaustive.  You must review your specific contract and, in many cases, the upstream prime contract, in order to determine those that apply to your situation.

New York City Standard Construction Contract:

  • Delay: notice must be provided within 15 days of delay causing event.  (Article 11)
  • Extra Work: daily and monthly T&M reporting.   (Article 28)
  • Dispute/Claim: notice must be provided within 30 days of written determination by                                    Engineer/Commissioner. (Article 27)

Under the terms of the New York City Standard Construction Contract, failure of the contractor to strictly comply with the contract notice requirements shall be deemed a conclusive waiver by the contractor of any and all claims for damages for delay arising from such condition and no right to recover on such claims shall exist. (Article 11.2), and failure to comply strictly with these requirements shall also constitute a waiver of any claim for extra compensation or damage on account of the performance of such extra work or compliance with such determination or order. (Article 28.5).  Failure to abide by the record-keeping requirements and periodic submission of verified statements as to damages may also result in waiver of your claim.

New York State Department of Transportation (DOT) Contract:

  • Disputed Work: within 15 calendar days of direction
  • Notice and Recordkeeping (Section 104-06)
  • Extra Work: daily, weekly and monthly
  • Time Related Disputes: within 15 calendar days of event
  • (If late notice – NYSDOT has no liability for damages which accrued more than 10 work days prior to notice – Section 105-14B)

Under the New York State DOT contract, “[f]ailure of the Contractor to provide such written notice in a timely fashion will be grounds for denial of the dispute and the Department does not have to show prejudice to its interest before such denial is made.” (Section 104-06(c))

Further, “[i]n the event the Contractor fails to provide the required written notice within the time limit established, or fails to maintain and submit the records specified above, any claim for compensation shall be deemed waived, notwithstanding the fact that the Department may have had actual notice of the facts and circumstances comprising such dispute and is not prejudiced by such failure of notice or recordkeeping.” Id.

In private improvement construction contracts, similar notice provisions also abound, often in conjunction with “No Damages for Delay” clauses.  For example:

“(a)  In the event Contractor’s Performance of this Contract is delayed or interfered with by acts of Owner, or by other events for which such Contractor is entitled to a time extension under the terms of this Contract, Contractor may request an extension of time for the performance of same, as hereinafter provided, but shall not be entitled to any increase in the Contract price or to damages or additional compensation as a consequence of such delay or interference.

(b)  No allowance for an extension of time for any cause whatsoever shall be claimed by, or granted to, Contractor unless Contractor shall have made written request upon Owner for such extension within forty-eight (48) hours after the event giving rise to such request.”

Moreover, in public contracts, a contractor delayed in completing its work is often required to file a request for an extension of time in order to continue to perform, and importantly, in order to continue to submit payment requisitions.  This process, aimed at avoiding exposure to delay or liquidated damages, is not automatic and must be justified by proof of the delay-causing event and the impact on your work.  Attention to detail when preparing and filing a request for an extension of time is essential to insure all your claims are reserved, otherwise they will be forfeited!

Notwithstanding the current “re-start” pressures asserted by owners and construction managers, contractors and subcontractors are not without important and valuable rights and remedies arising from Covid-19 restart demands.  Preservation of these rights and remedies, however, requires careful and timely consideration and evaluation of the contract documents and the facts and circumstances of your situation.  Absent prompt and timely notice and satisfaction of any contractual conditions precedent to asserting and maintaining a claim or contractual remedy, those options may be waived, released and lost.

The time to protect late job-completion claims is now, not later. Preserve your claims now, so you can decide whether to pursue them later when the merits of your claim on a delayed project can be more fully assessed.

In these types of situations, in order to determine your rights and potential remedies and how best to proceed, review of your contract documents with experienced construction counsel is critical to successful resolution and/or preservation of your valuable and important rights and remedies. Feel free to contact us at (516) 873-2000 with any questions you may have.