The world finds itself in the middle of a global health emergency, not one created on a production stage but a real-life pandemic with a high risk of spread and impact as declared by the World Health Organization. The construction industry is experiencing exorbitant disruptions in project activities due to COVID-19 that have substantial effects on schedule due to supply delays, labor shortages, and social-distancing constraints. The resulting financial impacts from the contagion will be discussed and potentially litigated over time between parties in a contract. Depending on the duration of the pandemic and associated orders, damages could continue to rise significantly, which could cause owner and contractor dissension. Such injuries may differ depending on where work is being performed.
There is no federal mandate on whether construction activity is considered an essential service; however, an Advisory Memorandum on the Identification of Essential Critical Infrastructure Workers was issued by the U.S Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (“CISA”). 1 This guidance from CISA has been utilized by municipalities to form local orders. These orders vary widely; therefore, construction activity in some areas is experiencing more significant impacts. Common-law doctrines such as impracticability, frustration of purpose, and impossibility could be invoked to excuse performance due to COVID-19; however, owners’ and contractors’ first step should be to review all relevant provisions under applicable construction agreements to determine whether a Force Majeure provision exists, if COVID-19, as an epidemic/pandemic, is a recognized Force Majeure event, and whether there is a duty to mitigate.
The presence of a Force Majeure provision in a construction contract is essential for the allocation of risk. The traditional application of the doctrine of Force Majeure allows for excusable and non-compensable relief from the contractual obligation to perform construction work due to an unforeseeable event that impacts performance under the contract. The contractor’s ability to perform, namely to construct, could be severely effected due to an occurrence beyond its control. If such provision exists, COVID-19 is likely to be considered a Force Majeure event.
Impacts by COVID-19 are pervasive and potentially will last for several months; however, a challenge may occur for any request for an excusable time extension if the contractor does not comply with certain obligations. In general, Force Majeure provisions require the impacted party to provide notice of the relevant Force Majeure event. Upon determining that the virus is a contractual Force Majeure event, mitigation duties may exist. A review of facts and governing contract language, along with applicable law, is necessitated to determine mitigation obligations.
Mitigation as a contractual requirement
The duty to mitigate might be a requirement under the Force Majeure provision, or more broadly under the section of the contract dealing with delays, which require specific mitigation measures to be deployed. In particular, any such duty would require the contractor to minimize costs by taking reasonable steps to reduce impacts. Reasonable efforts to mitigate should occur, upon notification to the owner of such a delay utilizing reasonable efforts to minimize the costs. The same efforts should be invoked to reduce schedule delays. The contractor has a contractual duty to take remedial actions to address impediments to any milestone or the completion date.
Mitigation associated with delayed delivery of material
COVID-19’s global impact on the supply chain has weighed heavily on construction, impacting the shipping and availability of materials. These impacts have led to contractors attempting to find alternative sources for materials in an attempt to continue work and mitigate associated damages. A reasonable mitigation effort when a particular material cannot be delivered due to the shutdown of a factory, ineffective delivery mechanism, or lack of necessary personnel could be alternative sourcing. If the needed material is clearly shown on the critical path and delayed delivery of the supply would result in the delay of the project completion date, the contractor would have the duty to take sufficient remedial action.
There are many ways in which the contractor can implement corrective action. For example, it would be prudent for the contractor to examine if there are substitution materials or an alternate supplier who has the material readily available on stock. If so, the contractor should request a substitution and procure alternative material, or consider issuing purchasing order to the alternate supplier, provided that the cost, time, and no other restrictive factors such as warranty exists. Also, the contractor could contemplate a request to expedite delivery of such material when it is economically reasonable and weighed against liquidated damages or extended overhead claims.
Mitigation associated with labor impacts
One particular difficulty associated with the pandemic is the constraints related to social distancing. It is foreseeable that certain aspects of construction activities would be impacted by social distancing, as specific work could require the craft to work closely. Further effects exist in a vertical construction project when trades are stacked and are required to work side by side, and also where transportation of the labor is necessary to and from construction sites. In such cases, it might be prudent for the contractor to consider engineered controls, staggered shifts of labor, and alternative transportation arrangements to meet the requirements of the social distancing.
Mitigation associated with changes in construction sequence or methodology
Alternative project-delivery sequencing or methodology could be explored if such change would potentially mitigate the effects brought forth by the impact of the pandemic. Such evaluation ought to include impacts on cost, schedule, and health and safety. Evaluation should occur of any proposed modifications and discussed with the owner. An example could include a machine that would be capable of allowing work to be performed while still maintaining the social-distancing requirement. If the machine is readily available at an acceptable cost, a prudent and responsible contractor should, at a minimum, approach the owner with an analysis and request an evaluation of the concept with the potential of being reimbursed the cost differential. Another example might be the resequencing of trade or construction activities to level out workforce resources during this period of pandemic. However, such efforts might result in an increase in time but also costs due to inefficiencies and added employees that might not be reimbursable under the Force Majeure clause.
Mitigation associated with suspension of work
The impacts of the Covid-19 might also result in a suspension of the project. The suspension of the project could be due to the owner’s directive, impediment, or unintended interruption of the work. Most modern day public-works contracts contain suspension clauses allowing owners to suspend work for convenience and the contractor is generally required to follow the suspension-of-work directive as a contract requirement. While the contractor is generally entitled to recovery of time and delay damages, provided that there are no other contractual remedies or provisions restricting compensation, the contractor must also mitigate damages while executing the suspension-of-work directive.
Owners should be advised to clearly define the scope of the suspension, whether in whole or in part, and also provide a written return-to-work order, even if not contractually required upon the end of the suspension. Contractors also must clearly understand the scope of work being suspended by the owner and document all costs and efforts to comply with the contract arising from suspension of work. Such documentation would include mitigation efforts associated with lost productivity, idle labor/equipment, and escalation costs (if any, however, escalation might be questionable during this pandemic due to its unique circumstances with lower oil prices). Examples of such mitigation costs might be returning rental equipment on standby and preparing alternative execution plans for owner’s review and approval.
In conjunction with mitigation obligations, the contractor and owner should simultaneously track and quantify cost and schedule impacts. To properly evaluate any such effects, the status before COVID-19 must be documented and considered; therefore, a dependable schedule is necessary throughout the project. Upon notice of the Force Majeure, tracking should immediately begin. Pertinent schedule impacts may include inefficiencies due to health and safety requirements, delays related to material supply, and staffing levels. The impact tracking should also compile relevant notices of guidelines, orders, and contract parties. Reviewing mitigation efforts in association with quantifying impacts will be instrumental in any resulting discussions or contract disputes about the Force Majeure or any alleged compensable contract changes.
COVID-19 requires a detailed evaluation as would any Force Majeure event. If litigation results, it is likely that courts will perform cost-and-benefit analysis in determining the reasonableness of the mitigation efforts. Appropriate documentation will be critical in a review. The contractor need not act if the cost of avoidance would involve unreasonable expenses. It is a question of fact whether steps taken to mitigate were reasonable. Also, the pertinent tracking information will be considered in determining schedule impacts and/or potential compensable damages. COVID-19 is unique in its nature but not in the aspect of planning for an uncontrollable and unforeseeable event in construction contracting. As such, contract language is critical in any review, and mitigation efforts and quantification of impacts should occur accordingly.
Anser Advisory, Santa Ana, California
Lanita McCauley Bates
Anser Advisory, Santa Ana, California
1. U.S. Department of Homeland Security Cybersecurity & Infrastructure Security Agency (March 19, 2020). Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response. https://www.cisa.gov/sites/default/files/publications/CISA-Guidance-on-Essential-Critical-Infrastructure-Workers-1-20-508c.pdf
Reposted from the American Bar Association