Delay and disruption claims are always a risk in the best conditions on a construction site. Never more so than during the global pandemic brought about by COVID-19. Since President Trump declared the COVID-19 pandemic a national emergency on March 12, 2020, most contractors, subcontractors and owners have reviewed the force majeure, change in law, suspension, change order, delay notice, and other applicable clauses in their contracts to understand what the parties’ rights, remedies and obligations are in the event of this novel catastrophe. Force majeure generally refers to a cataclysmic event that adversely affects a project and is outside the control of the parties. Depending on the specific contractual terms and the impact COVID-19 and related governmental orders have had on a specific project, this pandemic may be considered a force majeure, delay, change in law, suspension and/or other applicable event. Contractors and subcontractors may be able to use these clauses or the impossibility or implacability of performance defenses to attempt to excuse their late completion of projects that are delayed or interfered with due to COVID-19’s unforeseeable events and to possibly bring claims for delay and/or disruption due to increased costs caused by COVID-19. Conversely, owners may use these clauses to limit liability on owners due to delay or disruption claims or to pursue contractors for delay of a project as allowed by the Prime Contract.
I. DELAY
For contracts entered into before the COVID-19 pandemic, in determining whether a contractor or subcontractor may contend that its inability to complete its work in a timely fashion is a result of an uncontrollable, unforeseeable force, such as the COVID-19 pandemic, one must first look to the relevant contracts to determine whether force majeure, change in law, delay, suspension and/or other provisions may be used as a shield against an owner pass through or contractor delay claim or as a sword to pursue recovery of additional costs due to the pandemic.
Some Prime Contracts direct that a contractor (or subcontractor if the Prime Contract is incorporated into the subcontract by reference) who is excused by a force majeure or other applicable clause from liability to the owner for late performance is entitled to a noncompensable extension of time. The contractor or subcontractor may be protected from claims for liquidated or actual damages arising out of the COVID-19 caused late performance, but must bear its own costs to occupy and staff the project for longer than planned and budgeted. Other Prime Contracts provide for a compensable extension of time and require the owner to reimburse the Prime Contractor for its general conditions costs incurred during any delay period. Owners should also be knowledgeable about these contractual clauses to understand whether they may still have claims for liquidated damages for delays or may be subject to claims for increased general conditions caused by COVID-19 related delays.
In addition to knowing the contracts—both the Prime Contract and the subcontracts—it is important for owners, contractors and subcontractors to promptly document, communicate and provide notice regarding the delays caused by COVID-19 in the daily reports, meeting minutes, schedule updates and other applicable documents. It is important to submit daily reports and other updates that address adverse impacts to the critical path caused by COVID-19 as well as other delays that have impacted performance. Prompt, contemporaneous notice of impacts caused by COVID-19 or other matters generally may strengthen any delay claims that a party may have.
II. DISRUPTION
Unlike a delay claim, which captures the time and cost of not being able to work, a disruption claim "captures the cost of working less efficiently than planned." Bell BCI Co. v. United States, 81 Fed. Cl. 617, 636 (2008), aff'd in part, vacated in part, remanded, 570 F.3d 1337 (Fed. Cir. 2009) (citations omitted). Moreover, disruption claims exist even if the disrupted work was not on the critical path. Contractors and subcontractors may have claims for disruption if an external factor, such as COVID-19, requires the contractor or subcontractors to perform differently than planned in a way that adversely impacts the subcontractor’s productivity—which is typically measured in labor hours or equipment hours.
Oftentimes, a contractor or subcontractor’s largest risk and variable expense on a project is the cost of labor. If external factors require a subcontractor to perform differently than planned, to install the intended amount of work during a shorter duration or to install the work under materially different conditions, the contractor or subcontractors may have been disrupted. In making decisions or reacting to pandemic conditions in a way that could disrupt the work being performed, owners may ask their contractors whether and how a change may disrupt or affect the cost of their work so that the owner can make an informed decision before the changed work commences.
The COVID-19 pandemic and resulting governmental restrictions are disrupting supply chains and causing owners and contractors to make difficult decisions as to how to proceed on a project. For example, instead of accepting that an unforeseen disruptive event has necessitated a complete work stoppage or suspension, which would have caused the owner to bear the financial exposure of lost rents or a timely revenue stream because of the suspension, it may be more beneficial for owners to instruct their contractors to proceed with the project, be as efficient as possible and work around the impediments. That instruction will be passed down to subcontractors, vendors and others who will try to build the project. It is important for owners and contractors to understand whether changes to the project may cause a decrease to contractors and subcontractors’ productivity.
III. KEYS TO DELAY OR DISRUPTION CLAIMS
When a contractor or subcontractor is required to perform differently than planned, such as, for example, under a different sequence than scheduled, the work will almost certainly either take longer to perform (delay) or will take more labor hours to finish on time (disruption) or both. If an owner or prime contractor directs work to proceed under changed circumstances caused by COVID-19 or for any other reason, the contractor or subcontractors may want to make the owner fully aware of potential impacts and the contractor or subcontractor’s intention to seek additional payment if the contract permits it. Detailed notice that estimate the increased costs caused by the changed circumstances may be appropriate.
After this initial notice, parties may want to add a section to their daily logs and meeting minutes called "COVID-19 Impacts" and further detail specific unplanned costs—ingress costs, egress, overtime and missing materials. Documenting all of the specific impacts to the work with as much detail as possible may be prudent. Furthermore, it is important that owners, contractors and subcontractors validate planned costs, i.e. the baseline as to what the costs and expenses were expected to be so that the contractor and owner understand how the changed circumstances and decisions from the owner and contractor have led to increased costs.
If the parties agree on the scope, time and/or cost impacts of COVID-19 or a change directed by the contractor or owner, those should be documented in a change order. Similarly, parties want to be careful not to inadvertently waive delay or disruption claims by signing a document that includes boilerplate language waiving your delay or disruption claims. Change orders, payment applications and related lien waivers and releases often contain broad boilerplate language, which may waive or release all claims up through the date of the change order or payment, whether or not the claim has been previously presented.
Finally, owners, contractors and subcontractor may want to consult with knowledgeable legal counsel early in the process to maximize the likelihood of success regarding its claims. The attorney may engage claims consultants and together may analyze the specific contract, work plans, impacts, increased costs and factual and legal defenses, and help preserve and present claims in a favorable manner. Early consultation with an attorney may help identify and follow a path to a successful recovery in COVID-19 or other delay or disruption disputes.
