The last year has shown us that construction contracting is not immune to the impacts of the pandemic. From supply chain impacts to the variety of COVID-19 mandates to the risk associated with labor shortages and delays, construction contracts should react to the particular risks, costs, and the mosaic of rules that stem from the pandemic. While COVID-19 burnout is an affliction common to many, in 2022 contractors and subcontractors should resolve to get their contracts in shape and responsive to the pandemic’s exigencies.
Thus, our countdown of 2021’s contracting takeaways continues with Part 3 of our four-part series on construction contracting, where we examine the impacts of legislation enacted to contend with the public safety risks of COVID-19 and the contract clauses that require particular attention because of the unique realities of the pandemic. Specifically, we recap:
- Force majeure clauses
- Site safety and COVID-19 legislation and regulations
- Supply chain and project timeline disruptions
Relief from Force Majeure Clauses Will Wane
In 2020 and 2021, contractors on both sides of the table spent a lot of time learning the intricacies of a force majeure provision. In general, force majeure provisions address the risk of loss if contract performance is impacted, delayed, or prevented because of an event that is outside of the parties’ control. In evaluating a contract’s force majeure provision, a qualifying force majeure event often must be “unforeseeable” and specifically enumerated. Typically, these clauses only provide time-related relief (e.g., an extension of time or avoiding time-related damages) and do not provide compensation unless specifically negotiated. These clauses may include language similar to the following:
Neither party will be liable for any failure or delay in performing an obligation under this Agreement where such failure is attributable to causes beyond its reasonable control, including acts of God, war, terrorist acts, labor disputes, epidemics, pandemics (including the COVID-19 pandemic), quarantine, civil commotion, fires, floods, or generalized lack of availability of energy.
While force majeure clauses may have had particular force in the early days of the pandemic, over the last year, force majeure provisions have waned in their ability to provide relief for COVID-related delays and impacts, unless the provision specifically mentions COVID-19 as a force majeure event (such as the example above). Absent specific recognition of COVID-19 as a force majeure event, the longer COVID is around, the more contractors will be expected to be aware of potential pandemic-related risks and should expect the delays and impacts that might come from them. Consequently, in 2022 contractors and subcontractors should reevaluate relying solely on a contract’s force majeure provision to serve as the exclusive COVID-19 contingency. While we do not know what’s in store for 2022, you should treat most pandemic related challenges as foreseeable and focus on allocating the risk associated with those challenges accordingly.
Contracts Should Address Site Safety & COVID-19 Laws
In some form or another, construction contracts almost always include provisions addressing jobsite safety. Sometimes, these provisions are simple allocations of responsibility to the contractor for maintaining a safe worksite. Other times, that responsibility is shared among multiple parties or is addressed more tangentially.
Relatedly and in addition to responsibility for jobsite safety, many construction contracts include provisions requiring the contractor or subcontractors to abide by applicable laws, regulations, and ordinances in their contract performance. When contractors submit applications for payment, they may be warranting such compliance. In the era of COVID, those applicable laws could include local/federal vaccine mandates, social distancing guidelines, provision of personal protective equipment (PPE), and more.
Construction contracts should address the costs that come with complying with rules and safety considerations associated with COVID-19. Parties should budget for costs like the provision of PPE for their workers, disclaim responsibility for subcontractors’ or sub-subcontractors’ compliance with COVID-related safety laws, flow down jobsite safety obligations (to the extent delegable) and requirements to comply with COVID-related mandates and regulations, and maintain information on their workforce’s vaccine status. Contractors and subcontractors may even consider including contract provisions that shift or apportion among parties the costs associated with COVID-19 safety provisions. What’s important is that contracting parties acknowledge and plan for the likelihood of these expenses.
Likely the largest and most unknown issue facing contractors currently is the status of federal and local vaccination requirements. As of mid-December 2021, the enforceability of these mandates varies from state-to-state and locality-to-locality. Challenges to federal mandates are now before the U.S. Supreme Court, but it remains unclear when a conclusive decision will be reached. In the interim, contractors and subcontractors should be aware that mandates may come from the municipal, state, and federal levels. Certain requirements may also be imposed by project owners, even if not governmentally mandated. Contractors and subcontractors can avoid getting caught on their heels by keeping tabs on safety obligations in their contract and up to date on local, statewide, and federal rules that may impose additional site safety and labor requirements on their performance. As always, construction participants should seek guidance from counsel to ensure compliance.
COVID-19 Exacerbates the Risk of Supply Chain and Project Timeline Disruptions
COVID-19’s disruptions to supply chains may impact timeliness of performance, costs of performance, or both. Delays and supply chain disruptions may trigger applicability of different contract provisions, including force majeure provisions (discussed above), delay provisions, notice requirements, claim obligations, and more. To the extent price escalations or supply chain disruptions impact timeliness of performance, contracts generally take one of two approaches to these disruptions: (1) time but no money and (2) time and money.
Specific to price escalations, some standard form and manuscript contracts contain price escalation clauses that afford time and money for disruptions to supply chains. For instance, ConsensusDocs 200.1 Amendment (the “Amendment”) provides a standard form for parties to allocate risk of market conditions between the owner and the contractor. In fairness to both owner and contractor, the Amendment provides that if materials result in a contract price increase, the contractor is entitled to an adjustment in contract price; similarly, if material price fluctuations result in a decrease in the contract price, the owner is entitled to a reduction in the overall contract price. The Amendment also provides that if any covered escalations result in delays to project performance, the contractor “shall be entitled to an equitable extension of the Contract Time and an equitable adjustment of the Contract Price in accordance with [the Contract].” The Amendment requires that the parties provide 30-day notice of any such changes and supporting documentation. Additionally, parties can temper the breadth of the Amendment’s effect by attaching a schedule of materials that will be covered by the clause and by mutually agreeing to cap contract price fluctuations at a certain percentage.
Unlike the ConsensusDocs 200.1 provision, the AIA does not have a similar provision in its contracts that allows contractors to recoup costs associated with price escalations or delays. Instead, when using AIA’s form, contractors must attempt to seek monetary relief for these types of delays and disruptions through other contract provisions (i.e., claiming that increases in materials costs constitute changes to the work), which can be met with heavy resistance. The AIA, rather, captures the impacts to time with clauses similar to force majeure provisions. In AIA 201-2017 General Conditions, section 8.3.1, a contractor can recover only time if the contractor is delayed “by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with [the Contract], or other causes beyond the contractor’s control.” It is not clear whether a COVID-related delay would fit within these AIA enumerated disruptions and impacts.
What makes this issue more insidious is that each contract’s approach may appear in a variety of contract provisions, including force majeure provisions, termination provisions, damages provisions, change provisions, etc. To determine a contract’s approach, and thus, whether a party has a right to an extension of time and/or to compensation for COVID-19 related delay requires attention to detail and may be best evaluated with the assistance of counsel.
Parties should determine what they are willing and able to endure should COVID-19 continue to delay their performance on a project and increase their costs to perform. Read your contract carefully to determine your rights and responsibilities in the case of COVID-related delays and price increases. Work with counsel to determine your contract’s approach and whether and how you (i.e., subcontractors and contractors) can negotiate the right to claim or whether and how you (i.e., owners) can avoid increases to the contract price and extensions of time.
Up Next: Part 4
Stay tuned for Part 4, which we’ll publish next Tuesday, December 28, 2021. In Part 4, we’ll dive into Retainage.