The impact of COVID-19 on the construction industry will be greater than any crisis or economic fluctuation in more than a generation. Adding to the uncertainty is the impossible task of understanding the true business impact as each state navigates re-opening the economy and industries work to determine a new “business as usual.”
As stay at home orders are lifted, the construction industry is poised to see a rapid uptick in litigation from engineering firms, project management companies and contractors. After all, COVID-19 has meant increased risk for essential employees and resulted in delayed project timelines due to supply chains slowdowns, work stoppages and (likely) financing challenges.
Consulting with attorneys and insurance professionals is essential for those in the construction industry to understand their financial exposure and options to get losses and expenses covered under applicable contracts, insurance or various economic relief packages. These professionals provide critical expertise to help companies comply with contractual obligations, maintain relevant documents and understand costs in preparation for the anticipated onslaught of COVID-19-related litigation.
While companies identify means of recovering losses and preparing for litigation or insurance claims that may arise from COVID-19, it helps to know what questions to ask legal representation or insurance providers. This ensures they’re getting the critical information necessary to make informed decisions on recouping costs, rebuilding business and preparing for potential shutdowns in the future.
Ultimately, construction companies need to understand the full picture of their obligations, how to protect contractual recovery options and what, if any, insurance coverage might be available to help address losses and additional expenses.
What qualifies as an excusable delay?
Most construction contracts require certain milestones to be met on a certain schedule. Ordinarily, failing to meet those deadlines could result in reduced compensation or litigation over who caused the delay. However, delays likely to occur from COVID-19 are out of any party’s control. Force majeure, civil authority and excusable delay clauses can sometimes be used to find relief in such cases.
Questions to ask:
- Does the impact of COVID-19 qualify as a force majeure event?
- What if some of my tradesmen are deemed essential employees, but we’re dependent on work of “non-essential” personnel to meet our obligations on a given project? Does that qualify as an excusable delay?
- Are supply chain issues, materials shortages and government-ordered closures an excusable delay? If not, are there any statutes, regulations or common law principles that have the same effect?
- What if my area experiences a labor shortage due to the impact of COVID-19—is that an excusable delay?
- Would a change of law provision cover the current circumstances?
- The virus led to a lack of protective equipment for my crew. Does keeping my team onsite, without PPE, violate obligations to maintain a safe working environment?
- What evidence/documentation do I need to gather to support my claims?
What are the notice obligations under my contracts?
Most contracts include some requirement to provide notice of any issues that impact the ability to perform the required scope of work within the prescribed time frame. Failing to provide these notices could impact valid claims for delay damages at a later date, so working with legal representation to understand notice obligations will help to protect the business’ recovery rights.
Questions to ask:
- What are my notification obligations for each project contract? Under my financing terms? Under my insurance policies?
- What information does the project owner need to provide to project participants, financial institutions or lenders? Does their compliance impact my ability to recover?
- Do I have an obligation to collect delay information from my subcontractors? If so, what are their obligations to notify me?
- What do I need to provide in any notices that I send?
What rights do I have to terminate my contract and/or recover for my work already performed?
From a business standpoint, waiting out the COVID-19 crisis for work to start back up may not be the right thing to do. Explore various options with legal counsel to determine if a contract can be terminated and what rights the business has to recover for costs already incurred.
Questions to ask:
- Do I have the right to terminate my contract?
- If so, can I recover the costs and value of services of work already performed?
- Could I recover my anticipated profits if I terminate my contract?
- Do I have the right to file a contractor’s lien?
What are my duties to mitigate my damages?
The COVID-19 crisis may result in substantial losses. However, businesses likely still have obligations to mitigate, or lessen, those damages where they can.
Questions to ask:
- Are there contractual mitigation terms?
- Are there statutory or common law obligations beyond my contractual mitigation obligations?
- If I must use a particular kind of equipment or part and it is not available, does that eliminate any need to mitigate?
- If I am unable to get all the required parts from my current supplier, what are my purchase obligations from them? From an alternative supplier?
- If the cost of the goods exceeds the price contemplated in the contract, do I have to purchase the higher priced goods anyway?
- What do I need to document my mitigation efforts?
- How should I be communicating regarding my mitigation efforts? Whom should I notify?
What are my potential insurance recovery options?
After identifying all possible insurance policies, evaluate what, if any, claim options are available for the business. Conversations with separate insurance carriers about multiple policies will be necessary, so keep track of the policy number and answers received to make sense of the options later.
Questions to ask:
- Do I have insurance coverage for my losses resulting from COVID-19 or efforts to combat it?
- Are there any exclusions in my policy preventing me from recovering?
- Is the virus a pollutant under my policy?
- Does my commercial property insurance have a business interruption provision? Do the circumstances qualify me to file a claim under that provision?
- Does my trade disruption insurance cover delays due to supply chain disruption? How about increased costs to obtain the same goods once normal trade resumes?
- Does my builders risk policy provide coverage for physical loss to the site?
- Would government orders prohibiting site access qualify as “loss of the covered property?”
- Do any of my policies have “civil authority” coverage? If so, would they provide coverage for my losses?
- What are my notice obligations under my policies?
- What evidence do I need to support a claim?
- How do I submit a claim?
What’s recoverable?
Now that potential recovery options are identified, the next step is to determine what losses and expenses are recoverable.
Questions to ask:
- Are labor costs or additional expenses covered or recoverable?
- Can I recover for the impact of inefficiency causing further delays once sites reopen?
- Can I recover the initial or replacement costs of materials, supplies or equipment purchased before the job site was shut down?
- If materials, supplies, equipment or labor are more expensive now versus my bid price, can I recover the difference?
- If the scope of my work expands, do I have the right to recover for the additional costs and work performed?
- If there are any financing costs that I was obligated to pay for the duration of the project shut down and/or will need to pay for longer than anticipated, can I recover those costs?
- If I obtain relief under the CARES Act or other assistance programs, does that impact my ability to recover damages?
- Can I recover costs associated with business interruption, schedule or time impacts (including any impact on “on-time” bonuses and milestone dates) resulting from project delays?
- If there is additional time required to re-scope projects, adjust project schedules or obtain inspections, can I recover for the delay and business interruption to my work?
- What evidence do I need to support recovery of any of my damages?
The current climate makes navigating financial and legal realities tricky. But staying informed by asking the right questions, working to reach reasonable resolutions and starting to collect evidence in support of losses now will only help make the upcoming deluge of construction-focused litigation less trying and burdensome on a company. In addition, organizations will learn to structure future projects to provide greater protection against similar shutdowns or supply chain disruptions.
