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August 03, 2020 Article

Avoiding (or Minimizing) Construction Disputes Related to COVID-19

Kenneth B. Dantinne

The global COVID-19 pandemic has created a real-world bar exam question for construction lawyers: who bears ultimate responsibility for delays and increased costs resulting from the pandemic? By taking affirmative steps now, all parties—owners, lenders, general contractors, subcontractors, and design professionals—can avoid or, at the least, minimize disputes arising from COVID-19.

Review Specific Contract Language and Jurisdictional Mandates

Prior to taking any affirmative steps to minimize or avoid disputes, it is important to review the client's project-specific contract and any orders issued by state or local governments. This article will focus on specific provisions of the AIA A201. 

The contract provision that everyone is currently focused upon is the force majeure provision. While not a traditional force majeure clause, Section 8.3.1 of the AIA A201 does provide language that arguably covers delays caused directly or indirectly by the current pandemic, including: "an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor"; "unusual delay in deliveries"; "unavoidable casualties"; "other causes beyond the Contractor's control"; and, "other causes that the Contractor asserts, and the Architect determines, justify delay." Does an employee of a subcontractor that has contracted COVID-19 and comes to the site constitute "an act or neglect" on the part that subcontractor, thereby justifying an extension of time for the general contractor to complete the project? Parties should also be mindful of the time requirements associated with seeking an extension of time associated with the pandemic. Section requires the contractor to submit a claim for an extension of time within 21 days "after the occurrence of the event giving rise to" the claim, and Section requires the claim for an extension of time to include "an estimate of cost and of probable effect of delay on progress of the Work."

An additional key factor in the disruptions caused by COVID-19 is increased material costs. General contractors and subcontractors should be cognizant of the schedule of values associated with the project, what materials have already been purchased and whether they are on site, and what impact COVID-19 may have on material procurement and costs moving forward. As with time extensions, Section 15.1.5 requires a claim for additional costs to be submitted (which must be submitted 21 days after the discovery of the need to change the contract sum).

All entities on a project should further be aware of, and review carefully, any applicable government mandates which cover the project's location. For example, in North Carolina, Mecklenburg County's stay-at-home order provides that construction is an essential service; construction in Charlotte has therefore continued. In contrast, Boston's stay-at-home order does not deem construction projects essential.    

Identify Potential Supply Chain Disruptions

Anyone that has watched the news over the past month is well aware that the pandemic has hit different countries at differing times with varying degrees of severity. Contractors and subcontractors, to the best of their ability, should identify and assess material supply chains to determine where products are sourced and whether those materials will no longer be available in the near future. Some estimate that China supplies 30% of the building supplies used in the United States. The consequences of a lack of material production could be two-fold, as products may be completely unavailable once existing supplies are exhausted and, when the products do become available, a decreased supply will drive material costs up. General contractors, subcontractors, and material suppliers must stay alert to dwindling stock and price increases, including identifying alternative sources of materials to mitigate a lack of materials and increased prices. When contractors notice increased prices, they should comply with contract provisions in requesting increases to the contract sum.

Labor Force and Employee Safety

While conversations have been focused upon delays and damages caused by COVID-19, all construction companies and their counsel should continue taking steps to protect individuals on construction projects. Each company with personnel on the project should review applicable CDC and government guidelines regarding social distancing and applicable PPE to ensure the safety of all workers on the project. Companies should also be aware of changes to local, state, and federal laws or administrative rules for temporary changes resulting from COVID-19. Pursuant to provisions of the Families First Coronavirus Response Act ("FFCRA"), the United States Department of Labor, Wage and Hour Division passed temporary rules regarding paid sick leave for employees that contract COVID-19.

Any on-site talks should be limited by total personnel and social distancing guidelines should be followed during such meetings. When possible, meetings should be conducted remotely to minimize in-person contact. Everyone should review their schedules and sequencing to look for ways in which they can minimize contact between employees and trades in localities where construction has been deemed essential to avoid transmission of COVID-19 to the extent possible. Finally, if an employee or independent contractor does test positive for COVID-19, steps should be taken to ensure other personnel are aware of the positive test and steps should be taken to minimize transmission to others.

Communicate, Collaborate, and Compromise

The most important step for all parties to take to minimize or avoid conflicts arising from COVID-19 is to communicate effectively with all parties on site, especially between owners, the design team, and the general contractor. Any OAC decisions should be communicated downstream to subcontractors and design subconsultants to keep everyone on the same page when battling issues that arise as a result of COVID-19. Owners, the design team, and the general contractor should collaborate to minimize disruptions on site and all parties will need to compromise on various issues to continue work and avoid disputes. These discussions should include preparing for inevitable delays and forecasting whether contractors will seek extended general conditions.

Document Everything. Any time an issue arises, the affected party should document the issue in a detailed manner and comply with all applicable contract provisions regarding notice to the owner or architect. The contractual provisions governing notice and required documentation are a good start but, in this situation, it is better to be overinclusive. If materials are delayed because the delivery driver is in quarantine because his wife is a nurse at the local hospital (yes, this really happened to a client), the affected contractor or subcontractor should document what happened, provide any documentary evidence--whether it is an email, text message, or notes taken from a phone call--and communicate to the owner and designer what the issue is, and what impact the issue has upon construction. In short, document all schedule, material and equipment, and cost impacts. That documentation and any required notice should be supplied to owners or designers in strict accordance with the applicable contract documents.

Be Proactive in Downstream Communication. General contractors should be proactive in reaching out to first-tier subcontractors and suppliers. Determine what tiered contractors are on site on behalf of first-tier subcontractors. Speak frequently with the subcontractors and material suppliers to identify COVID-19 issues. General contractors should make it clear that delivery delays, schedule delays, and notes on sick employees (while complying with applicable privacy laws) need to be communicated to the general contractor as soon as subcontractors and suppliers become aware of the issue. The lead designer should take the same steps with consultants.

Review Insurance Policies and Discuss the Situation with Agent or Broker. Any construction project has a myriad of applicable insurance policies. Companies should reach out to its agent or broker to determine whether a policy may cover disruptions or increased causes arising from COVID-19.

Be Adaptable. This is an unprecedented situation and it will be difficult to navigate without any disruptions, delays, or disputes. All of those on a project should be willing to adapt as conditions change given the current pandemic. All parties must be flexible in responding to changing conditions. Such flexibility will be nearly impossible if everyone on site is not communicating effectively.

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Kenneth B. Dantinne

Hamilton Stephens Steele + Martin, PLLC, Charlotte, NC, Division 3 (Design)