July 17, 2020 Articles

How to Advise Construction Clients to Maintain Contractual and Commercial Hygiene During COVID-19

The task is twofold: to navigate existing contractual obligations in a fluid and uncertain environment and to guide clients in negotiating contracts for projects with participants keen on shedding risk.

By Luke R. Conrad and Molly E. Manson

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Arriving in the midst of a construction boom, the global coronavirus pandemic (COVID-19) has rocked the construction industry and introduced uncertainty into a previously robust industry sector. During normal times, project participants face a number of challenges in delivering a construction project on time and within budget. Rarely, however, are projects affected by the supply chain shutdowns; changes in governmental laws, orders, and regulations; and true force majeure events faced today. For counsel advising construction industry clients, the task is twofold: to navigate existing contractual obligations in a fluid and uncertain environment and to guide clients in negotiating contracts for projects with participants keen on shedding risk. We examine these challenges in this article.

Stay the Course

Companies engaged in existing construction projects are seeking to mitigate the life-safety risks and the financial effects of COVID-19. Amidst a crisis such as this, even the most sophisticated parties can overlook basic contract adherence. In advising construction industry clients, it is important to remember that simple tasks—the blocking and tackling—are essential to recouping losses within the framework of existing contracts. Standard form agreements generally require contractors to document events that have an impact on the project and update the schedule and budget to reflect those events. For example, the following clause appears in the American Institute of Architects’ (AIA’s) standard form A201 General Conditions of the Contract of Construction:

3.10.3 Contractor shall perform the Work in accordance with the Progress Schedule as well as within the Milestone Dates and completion dates specified in the Contract for Construction. The times set forth in the Contract for Construction for all Milestone Dates and the time of completion must govern, and the Progress Schedule must be adjusted to meet these dates. Contractor shall maintain such Progress Schedule on a current basis in accordance with the provisions of this § 3.10 and shall keep proper records to substantiate actual activity durations and completion dates.

(Emphasis added.)

Counsel should advise clients to adhere to these painstaking requirements, not only because they are mandatory but also because well-kept records are key to recovery of potential COVID-19-related impacts.

In counseling industry clients through the bid stage, attorneys should continue to advise project participants to adhere to best practices, taking advantage of opportunities to submit questions, perform due diligence, and seek clarification regarding uncertainty in the scope and associated risks of the anticipated work. Most successful companies have a rigid procurement program and should continue to maintain risk management protocols. Absent an emergency procurement, COVID-19 will not obviate contractual and statutory bidding requirements, and it is important that parties memorialize material terms or bid exceptions in the contract documents.

As attorneys, we must examine the impacts of COVID-19 holistically, particularly at the negotiation stage. Given the debilitating impact on supply chains, provisions governing labor and materials are particularly important. For example, some standard form construction contracts, such as the AIA’s standard form A201 General Conditions of the Contract of Construction, do not account for supply chain shutdowns, which have the potential to cause substantial construction delays and cost overruns. Parties can consider drafting custom amendments or adding a form cost-adjustment clause such as Associated General Contractors of America (AGC) ConsensusDocs 200.1 Potentially Time and Price-Impacted Materials Amendment, which provides owners and contractors with a baseline price and calculation method for potential adjustments to material prices. See AGC Consensus Docs Guidebook (2019).

In addition, disruptions in labor and material supply lead to efforts to substitute specified materials or equipment. In an effort to limit delays, owners and contractors may hastily “agree” to substitute a specific product without a formal substitution. Under the AIA’s standard form A201 General Conditions, substituting materials without approval may constitute a breach of the contractor’s obligations:

§ 3.4.2 Except in the case of minor changes in the Work approved by the Architect in accordance with Section 3.12.8 or ordered by the Architect in accordance with Section 7.4, the Contractor may make substitutions only with the consent of the Owner, after evaluation by the Architect and in accordance with a Change Order or Construction Change Directive.

While provisions such as this may appear to be boilerplate, counsel advising construction industry clients during COVID-19 should emphasize the importance of contract adherence, particularly when diverging from the contract documents.

Attention to Project Documentation

As we know, an attorney’s ability to craft successful legal arguments depends on the underlying facts of the case. In construction claims, support is often found in progress reports, daily logs, change orders, and other project records. Because most project participants are focused on building projects, as opposed to claims, contractual record-keeping requirements can be overlooked. This is particularly true during a large-scale crisis such as COVID-19, where parties develop a sense of cooperation or comradery and often assume they will “square up” once the emergency subsides. While maintaining relationships can be a reputational necessity, it is important to remind clients that COVID-19-related disputes may take years to resolve and that an arbitration panel or judge evaluating performance—years removed from the dispute—is likely to favor positions supported by contemporaneous records.

To that end, counsel should encourage clients to maintain complete, clear, and accurate records that provide facts and details of all tests, inspections, and work performed on the project. Not only are such records mandatory under most standard form agreements, but these records may be a condition precedent to a party’s recovery. Successful construction companies maintain systemized programs for the timely submission of project records such as schedule updates, meeting minutes, daily logs, and safety plans. By ensuring the continuity of these best practices, parties can monitor the real-time impacts of COVID-19 and simultaneously arm themselves with documentary evidence to recoup potential losses.

Avoiding Unnecessary Risk

Whether construction is deemed an essential service during COVID-19 depends on the jurisdiction. Although most jurisdictions allow segments of the construction industry to remain open, large portions of the construction industry nationwide have been limited or suspended. In jurisdictions where projects have been suspended or where economic uncertainty has jeopardized project funding, companies may explore other opportunities.

The prospect of keeping a company’s workforce productive through new opportunities can be alluring to clients during times of economic volatility. However, client forays into new jurisdictions and industries, especially in uncertain times, can be a recipe for problems and disputes. Counsel advising clients in this situation should assist in identifying risks and challenges during the bidding process and advise on strategies to manage these risks. Attorneys should advise clients pursuing projects outside their comfort zone to assess the local labor market, construction conditions, environmental concerns, local retainage laws, and the legal and political climate.

Advising Clients to Use Tools at Their Disposal

In addition to the considerations above, attorneys should strive to keep clients abreast of the risk mitigation and tactical tools at their disposal such as insurance and bond products. Clients should be encouraged, with the assistance of counsel and insurance brokers, to dust off existing insurance policies to determine potential coverage. Whether coverage is available will depend on the language of the policy. That said, several jurisdictions are implementing legislation to retroactively amend coverage for COVID-19-related losses, and counsel should keep clients informed of these developments within the jurisdictions in which they operate.

Payment and performance bonds are additional risk mitigation tools. Payment bonds guarantee the payment of those who provide labor and material on the project, whereas performance bonds guarantee the performance of the work in the event of default. Most jurisdictions have statutory requirements governing payment and performance bonds on public construction projects; however, bonds are used less frequently on private work. In light of these uncertain times, attorneys negotiating contracts and securing financing for private construction and development work should consider bond products.

Conclusion

COVID-19 is uncharted territory for project participants and counsel alike in addressing construction risk. As counsel for the construction industry, we strive to implement risk management strategies that combine an emphasis on stringent contract compliance with prudent creativity in reacting to market, industry, and governmental influences. Indeed, it is not only the titans of the construction industry that will survive; it is also those companies that can timely identify market shifts and risk factors and pivot, as necessary. No matter where a particular construction project stands in terms of its lifecycle—whether it be in the procurement stage, in the negotiation process, or midway through construction—counsel can deliver value to clients by identifying risks and opportunities and assisting clients in weathering the storm.

Luke R. Conrad is a partner at Hinckley Allen & Snyder in Hartford, Connecticut. Molly E. Manson is an associate in the firm’s Boston, Massachusetts, office.


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