In early March 2020, COVID-19 seemed like a distant threat, but we are now too well aware of its rapid intercontinental spread. Millions of people on every continent except Antarctica have been infected and most countries and every state have implemented some sort of social-distancing measure. While there is evidence the curve has begun to flatten, the impacts of COVID-19 will likely continue to be felt for months to come. And, as economies begin to reopen, only time will tell whether there will be additional spikes in infections and the need for additional rounds of restrictions.
The construction industry has not been spared from the impacts resulting from COVID-19. Projects have been and will be impacted in a variety of ways. When COVID-19 impacts a project, questions immediately arise such as whether a time extension is warranted? Can work be suspended or terminated? And is additional compensation justified? This article addresses these issues under common contract language, but the specific language under each contract should be analyzed in concert with the controlling law.
Delays caused by COVID-19
For COVID-19-impacted projects, one of the first questions will typically be whether your construction contract contains a “force majeure clause” and, if so, whether the scope of that clause covers the situation presented. Force majeure provisions, sometimes known as “act of God” clauses, may excuse contractual obligations due to unavoidable circumstances outside of a party’s control. See, e.g., AIA A201-2017 at § 8.3.1; Consensus Docs 200 at § 6.3.1; see also Federal Acquisition Regulation (FAR) 52.249-14; Uniform Commercial Code (UCC) § 2-615(a). The language in force majeure clauses can vary (and may not even use the word “force majeure”), so the specific language in each contract should be evaluated and analyzed under controlling law, as jurisdictions are not uniform in their interpretation of force majeure
It is also important to bear in mind that force majeure clauses (or the applicable law interpreting them) often require the event to have been unforeseeable. While impacts from the COVID-19 pandemic may not have been reasonably foreseeable in early 2020, the question of foreseeability may become less clear for projects awarded in March 2020 and beyond.
If your contract has a force majeure cthe contract likely will also define the relief available for a force majeure event. For instance, if there is a force majeure event, the standard form language in AIA and ConsensusDocs contracts provide for a mandatory extension of time. See, e.g., AIA A201-2017 at § 8.3.1; ConsensusDocs 200 at § 6.3.1. While the form language is mandatory, the amount of an extension is not defined. Nor is the extension self-effectuating. Thus, the process for submitting claims must still be followed. See, e.g., AIA A201-2017 at § 8.3.2; ConsensusDocs 200 at § 6.3.1.
When submitting a claim for additional time, merely claiming delay often will not suffice; instead, the claim should include an estimate of the probable effect of delay on the project. E.g., AIA A201-2017 § 22.214.171.124. The claimant should also be prepared to demonstrate that the delay was caused by COVID-19, rather than another concurrent delay impacting the project critical path. Furthermore, notice requirements should be followed. That includes giving timely notice of delay and sending notice in the required form.
Right to suspend or terminate work
Owner’s right to suspend or terminate work
Separate and apart from force majeure events that may apply when a contractor or subcontractor is impacted by COVID-19, owners oftentimes have the right to suspend or terminate work for their own convenience. For example, an owner may want to delay completing construction of a building if its business could not operate as planned due to existing COVID-19 restrictions. Or the owner may decide to scrap the project all together.
In the event an owner elects to suspend work, a commensurate time extension should be granted, unless there is a concurrent delay for which the owner is not responsible. See, e.g., AIA A201-2017 § 14.3.1-2. If the owner terminates the project, all work should cease except as necessary to protect and preserve the existing work. Subcontractors and suppliers should also be notified immediately to prevent the performance of any unnecessary work.
Contractor’s right to stop work or terminate the contract
Contractors typically do not have an unbridled right to terminate their contracts with owners. If there is a dispute about additional time or compensation for a COVID-19-related issue, a contractor will generally be required to continue working while dispute resolution procedures are followed. However, if a contractor is unable to work for an unreasonable period of time through no fault of its own (and through no fault of its subcontractors and sub-subcontractors), then the contractor may have termination rights.
For instance, if work cannot proceed for a specified period of time due to an order of a court or other governing authority, then the contractor should be allowed to suspend work for the duration of the order (assuming there is no other permissible work it could be doing) and may even have the right to terminate if the delay lasts long enough. See, e.g., AIA A201-2017 at § 14.1.1 (right to terminate if work cannot proceed for 30 consecutive days).
Additionally, if the aggregate total of days an owner suspends work exceeds certain contractually-defined thresholds (the total number of days scheduled for completion or 120 days in a 365-day period under the form AIA language, see AIA A201-2017 at § 14.1.2.), then the contractor has the right to terminate upon providing proper notice. Of course, whether a contractor should exercise such a right will depend on its pipeline of other available work, which may be impacted as well due to COVID-19.
Subcontractor’s right to stop work
In analyzing whether a subcontractor has the right to stop work, the language in the subcontract is the first place to start. Pay careful attention to whether there is a flow-down provision that gives the subcontractor the same rights and obligations as a contractor with respect to the owner. Also be mindful of notice requirements. Frequently, the contractor submits claims to the owner on behalf of the subcontractor, so a subcontractor will need to be especially vigilant in such instances in order to give the contractor sufficient advance notice to allow it to act within the timeframes set forth in the prime contract.
Right to Additional Compensation
In the event an owner suspends work, the form AIA contracts provide for a mandatory increase in the contract sum for any increases in costs, plus an allowance for profits. See, e.g., AIA A201-2017 at § 14.3.2. In the event an owner terminates a project, under the form AIA contracts, “the Owner shall pay the Contractor for Work properly executed; costs incurred by reason of the termination, including costs attributable to termination of Subcontracts; and the termination fee, if any, set forth in the Agreement.” AIA A201-2017 at § 14.4.3.
If the owner takes no action to stop or change the work in response to an epidemic like COVID-19, the question becomes whether there is a basis for a claim by the contractor for additional compensation regardless? This is where the specific terms of each contract and the surrounding circumstances will become vitally important.
For instance, the form ConsensuDocs force majeure section provides for a mandatory “equitable adjustment” in the contract price. See ConsensusDocs 200 at § 6.3.2. The ConsensusDocs Guidebook explains that the term “equitable adjustment” should generally include the entire cost of delays not caused by the contractor, plus a reasonable amount of overhead and profit for extra work.
The AIA force majeure section does address entitlement to damages, although it specifically says that section “does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.” AIA A201-2017 at § 8.3.3. AIA documents also contemplate recovery of additional compensation when the project is impacted by an emergency. See AIA A201-2017 at § 10.4. Contractors and subcontractors may point to the fact that the World Health Organization, the President of the United States, and Governors of most states have declared the COVID-19 pandemic to be an emergency.
In contrast, the U.S. Civil Board of Contract Appeals recently ruled that under a “firm, fixed-priced contract” the contractor assumed the risk of unexpected costs when the contractor sought additional compensation for a project in Sierra Leone that was impacted by the Ebola virus. See Pernix Serka Joint Venture v. Department of State, CBCA 5683 (Apr. 22, 2020). Thus, the contractor was only entitled to additional time, which had already been granted.
In the event a contractor has a right to terminate and exercises that right, the contractor can usually recover payment for work performed, reasonable overhead and profit for work not executed, and costs incurred as a result of the termination. E.g., AIA A201-2017 at § 14.1.3.
Finally, as noted above, subcontractors should check their subcontracts and look for flow-down provisions to see what rights may be available against the contractor or owner. Frequently, a subcontractor’s recovery is limited to any recovery the general contractor obtains from the owner. In such instances, a subcontractor should work closely with the contractor to ensure that it has everything it needs to submit a sufficiently detailed and timely claim.
The aforementioned analysis is based upon commonly used language and form language. If one of your projects may be impacted by Covid-19, it is vital to check the language of your specific contract since form documents are often revised. It is also imperative to know the law of your jurisdiction.
It is also important to document any COVID-19-related impacts from the outset. Although COVID-19 is at the forefront of everyone’s mind now, memories may fade if a project finishes behind schedule and over budget down the road. And just because there is a delay or cost overrun during the pandemic does not necessarily mean it was caused by COVID-19.
Finally, contractual notice requirements and procedures for seeking additional time and compensation should be followed carefully. If your contract is silent or ambiguous about what you should do, it is better to err on the side of caution by requesting guidance on the front end to avoid a procedural dispute later.