COVID considerations for future construction contracts – Part 2

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The arrival of COVID-19 caused abrupt changes to construction practices. In a matter of days, things went from business as usual to social distancing.

While many manufacturers pivoted from making cars to PPE, the construction industry had to stay focused on keeping projects moving while ensuring safety from the new risks presented by the pandemic. In executing on the new normal, owners, general contractors, subcontractors and suppliers have turned to Federal guidelines, state directives and the language of parties’ contracts.

What many parties have learned is that the standard contracts they have used, or at least been familiar with over the years, do not have language that is specifically tailored to the current circumstances.

This article is the second in a series (the first is HERE) and focuses on additional considerations parties should have in future contracts in light of the challenges and changes COVID-19 has presented.

Health and safety

Construction contracts generally contain a broad obligation on the contractor to keep the project site safe (See Section 10.2.1 of the AIA A201-2017 as an example). However, these standard safety clauses are mostly geared toward protecting against personal injury and property damage and, as a result, should be modified to address preventing a COVID-19 outbreak. Ample guidance on suggested preventative measures exists at both the State and Federal level and should be incorporated into parties’ contracts.

Also consider adding a mandatory reporting requirement (to the owner and the prime contractor for subcontracts) if a worker tests positive for COVID-19 and a mandatory 14-day quarantine for all such workers. Further additions to your health and safety clause will likely be needed if the project involves work at or adjacent to an active facility, such as a retirement community, restaurant or hospital.

Finally, be mindful of State and Local specific restrictions so you know to fist bump as opposed to shake hands in Alabama, or that no common water coolers can be on-site in Dallas County, Texas.

Changes in law

Both ConsensusDocs 200-2019 (Section 3.21.1)  and AIA A201-2017 (Section 3.6) have “change in the law” language in their standard form agreements. The ConsensusDocs clause has a broad focus for changes in law after the date of the agreement that allow for equitable adjustments to contract price and time.

The AIA clause limits the Contractor’s right to a change order as a result of a change in the law to changes after “bids are received or negotiations concluded …” which impact taxes only.

Parties may be well served to set up their own change in law clause which addresses matters such as: (a) the date upon which changes will be measured; (b) a clear definition of “change of law”; (c) the materiality threshold for cost impact of changes in the law; (d) risk allocation of the change in law between the owner and contractor; and (e) mitigation obligations.

Given the absence of uniform legal standards for dealing with COVID-19 across the United States, it is prudent for owners and contractors to not only understand what legal requirements are in place at the project location at the time of the agreement, but to also set up a workable process to deal with future changes as well.

Evidence of owner’s financial arrangements

The ability of owners to continue funding projects is a critical question and contractors need an answer that is timely and reliable.

Depending on the contract, contractors may be able to ask about the owner’s financial standing, and have recourse to stop work. The AIA A201-2017 affords a broad request for financial information before works starts, while requests during the project are tied to different triggers, such as a failure of an owner to make a payment, a reasonable concern about an owner’s ability to pay and a change in work that materially impacts the contract price.

ConsensusDocs 200-2019 and DBIA 535-2010 likewise have clauses allowing contractors to ask owners for evidence of project financing/adequate funds to continue. Both documents further allow for contractors to stop work if they do not receive adequate assurance of the owner’s financial wherewithal to continue with the project. The ability to pause work while financial concerns are dealt with could prove critical going forward.

Contractors should ensure that every agreement they enter into should have reasonable language allowing them to timely follow up on financial concerns and, if possible, language allowing the contractor to stop work if not provided sufficient evidence of an owner’s ability to pay not just for work performed to date, but also going forward. Without this type of language, contractors may be forced to rely upon other legal concepts like anticipatory breach to stop work on a project where payments have remained current, but where the contractor has strong reason to believe that the owner’s funding has or will be curtailed in short order.

Suspension and termination

Many owners (and contractors) have been in the unenviable position of deciding whether to terminate or cancel projects as a result of COVID-19. The AIA A201-2017 and ConsensusDocs both allow for owners to suspend performance at any time, for any duration and for any reason.

If the owner suspends the project, the contractor is entitled to a contract adjustment for time and price. The main differences in the contracts are tied to when the contractor can terminate if the project is suspended — for AIA, the contractor can terminate if repeated suspensions of the work by the owner constitute in the aggregate more than 100 percent of the total number of days scheduled for completion, or 120 or more days in any 365-day period, whichever is less.

Contractors under ConsensusDocs can terminate more quickly (after 30 days of stopped work) and for reasons beyond the owner’s suspension (including a court or other governmental order, or governmental act which renders materials unavailable through no fault of the contractor).

Parties should evaluate whether the termination/suspension clauses in their agreements fit what they want in terms of grounds and timing. They may also want to confirm with their project lenders and/or investors who may have opinions on a clause that until recently was likely relative far off their radar.

Conclusion

Unfortunately, it does not appear that there will be a quick resolution to the COVID-19 pandemic. Rather, the entire United States will need to adjust to different ways of doing business.

Construction has and will continue as an essential business, not just for projects already underway, but for new projects as well. When reviewing new contracts, parties should closely scrutinize whether the standard language clearly addresses COVID-19 considerations in a fair and balanced manner.

While Henry Ford famously said that if you always do what you’ve always done, you’ll always get what you’ve always got, do not assume that the new COVID-19 climate will deliver the same results with the same contracts.