In light of the rapidly evolving coronavirus / COVID-19 situation, Owners and Contractors are advised to take immediate action to minimize their damages, as set forth below.
Action Plan for Owners and Contractors.
1. Review and Assess Governmental Directives and Orders.
The rapidly changing COVID-19 situation resulted in “shelter in place” orders for Northern California Counties, including Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Sacramento, Solano, Sonoma and Santa Cruz counties. The orders direct residents to shelter at home for three weeks (from March 17 to April 7, 2020). The orders also limit activity, travel and business functions to only the most essential needs. There are exemptions under the orders for “Essential Businesses”, including some types of construction work. For example, the Contra Costa County order provides that: “individuals may leave their residence to provide any services or perform any work necessary to the operations and maintenance of “Essential Infrastructure,” including, but not limited to, public works construction, construction of housing (in particular affordable housing or housing for individuals experiencing homelessness) . . .” No such express exemption is provided for other types of general commercial construction. Thus, the orders provide a clear exception for public works construction and construction of affordable housing, but are not a model of clarify as to other projects. Construction projects that are subject to the public health orders are required to suspend all operations. In contrast, construction that is exempt from the orders may proceed, with reasonable safeguards in place to maintain social distancing (i.e., individuals working at least six feet apart, to the extent possible). To determine the impact of any public health orders on your business, it is critical to understand such orders and their impact. In light of recent events (such as the Sheriff reportedly closing down Tesla’s manufacturing facilities as “non-essential,” and reports of local residents already complaining about non-compliant construction projects that remain in operation), we highly recommend communicating with local authorities on their intent and interpretation for ongoing projects. We expect further clarity in the near future. It should be noted that construction trade organizations such as Associated General Contractors (“AGC”) and the Building Industry Association (“BIA”) are working to obtain further clarification of the orders.
2. Review and Assess Contracts.
In light of the rapidly changing situation, Owners and Contractors should review and assess contracts for relevant provisions regarding delays and extensions of time, force majeure (i.e., unforeseeable circumstances that prevent performance), suspension of work, termination, and the provisions governing how and when to provide proper notice of such delays/suspension/termination. For example, the commonly used American Institute of Architects (“AIA”) Agreements address the subject of delays and extensions of time under AIA A201 2017 General Conditions, at Article 8.3.1, which provides the Contract Time for construction can be extended if the Contractor is delayed by “causes beyond the Contractor’s control,” provided the contractor gives proper notice of its claim under Article 15 of that same document. In other words, the AIA contract provides the right for the Contractor to request an extension of a project schedule if it is delayed by COVID-19, and requires that specific steps be followed before an extension can be approved. For federal construction projects, Federal Acquisition Regulation (“FAR”) Section 52.249-14 governs, and specifically identifies “epidemics” as qualifying as a basis for an excusable delay. The FAR also contains specific procedures for claiming delays and additional costs. In order to assess your rights and liabilities due to COVID-19, it is critical to fully understand all relevant contract provisions. After all, the pandemic may result in delays in receiving materials, labor shortages, suspension of work, and other impacts. Any such impacts will cause scheduling delays and cost impacts, and the party liable for those impacts may hinge upon providing proper notice of those claims, per the terms of your specific contract.
3. Provide Immediate Notice.
Owners and Contractors should provide immediate notice of potential impacts relating to COVID-19. This is commonly required under construction contracts such as the AIA A201 as well as the FAR. In general, notice should state that due to the COVID-19 situation (and governmental directives and orders as applicable), the Owner/Contractor is advising of potential impacts to the project (e.g., potential suspension of work, shutdown, delays, increased costs, etc.). Even if information is lacking regarding specifics, notice should still be provided as soon as possible per the contract documents. If an estimate of the impacts (time and/or cost) cannot be provided, the notice should state so and further advise that updates will be provided as more facts and information becomes known. The key is to provide prompt notice and communication regarding delays and impacts in accord with the contract documents.
4. Identify and Track Time and Cost Impacts.
Owners and Contractors should make efforts to segregate and track time and cost impacts from any delays caused by COVID-19. In other words, time and cost impacts should be tracked as they occur. For example, daily reports and schedule updates should include notations regarding delays caused by COVID-19, and separate cost code(s) should be set up to segregate and track cost impacts. This type of documentation can prove invaluable after-the-fact when trying to quantify the amount of any claim.
5. Take Proactive Steps for Workplace Safety.
Given the health hazards created by COVID-19, proactive steps should be taken regarding workplace safety. A heightened protocol regarding a hygiene and workplace safety should be emphasized to staff and in job site meetings, and be documented. Specifically, any public health orders need to be reviewed and followed, including the COVID-19 orders regarding social distancing, enhanced cleaning, etc.
6. Other Steps to Mitigate Impacts.
In addition to the foregoing, other steps should be taken to mitigate impacts and maximize potential avenues of recovery, including:
- Review and revise pending contracts not yet executed regarding the risk of unforeseen delays, force majeure clauses, damages for delays, etc., especially in light of the current situation.
- Consider insurance options to mitigate impacts including trade interruption insurance, supply chain risk insurance, subcontractor default insurance and potential coverages for business interruption losses. Most standard commercial general liability and builder’s risk policies require damage to physical property to obtain coverage (“direct physical loss of or damage to property”); the battleground on those policies will be whether viral contamination of premises constitutes direct physical loss or damage. Actual insurance policies need to be reviewed regarding the specific language, coverages provided, exclusions to coverage, etc., to make a proper determination.
- Develop a plan of action for unforeseen situations similar to COVID-19 regarding notice, documentation of impacts, etc., which can streamline the handling of future situations.
The COVID-19 situation presents a challenging situation for Owners and Contractors to navigate for ongoing construction projects. Owners and Contractors should take immediate and proactive steps to protect themselves from delays, shutdowns, shortages of labor, material, equipment and cost impacts. By taking such steps, Owners and Contractors can put themselves in the best position to minimize their damages while optimizing potential recoveries.