Subtle (and Not So Subtle) Effects of COVID-19 on the Construction Industry

Troutman Pepper
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Troutman Pepper

When is it going to return to “normal”? We all have been asking that question. Well, for the construction industry, it may never return to “normal.” COVID-19 may have permanently changed the landscape of the construction industry in many ways. Depending on your perspective, many changes could be for the better. We may have to alter how we do business to address some new issues and business concerns. Here are just a few issues that the pandemic has brought to the forefront of our industry.

  1. Virtual Dispute Resolution: Social distancing and closure of the courthouses in many jurisdictions across the country caused numerous meetings, court appearances, depositions, mediations, hearings and arbitrations to be held virtually instead of in person. Once over the initial “discomfort” with using virtual platforms such as Zoom, Skype, BlueJeans, etc., the feedback from many in the industry is that this approach is incredibly efficient. Video conferences eliminate travel time and permit people to participate who would normally not be able to meet in person, due to distance or other commitments. We believe that the use of video conferencing has become entrenched into the daily routine. One additional outcome of this, that everyone needs to understand from the very beginning of a project, is the need to document everything — absolutely everything. Due to the difficulty of meeting in person, we have seen many more disputes initially handled on paper submissions. It is easier to be successful in your claim if it is well-documented. This was true before COVID-19, but now is even more critical.
  2. Work Backlog: Early on in the pandemic, during the initial shutdowns and stay at home orders, private work projects came to a halt, while many public work projects were deemed essential. Not only did these projects proceed, but some public agencies took advantage of the lack of commuters and quiet streets to add work to existing contracts. Now we are seeing a distinct turn. While stay at home orders are being lifted and private construction is returning to pre-pandemic levels, the pandemic has devastated municipal capital budgets. We have seen contracts terminated or suspended, work deleted and future tenders put on hold. For public contractors, as the current backlog of work is burned off,  the scarcity of future work can significantly strain cash flow and possibly the viability of the company. It is imperative to remain disciplined in bidding, watch your margins, stay within the geographical footprint and industry sectors. This is not necessarily the best time to expand. Sometimes the best project is the one you did not win.
  3. Employee Safety and Unions: Skilled craft persons working side-by-side on a project has always been the cornerstone of construction. Social distancing is not always possible, and people are worried about contracting COVID-19. This has heightened the health and safety protocols on projects. From additional PPE, social distancing and limiting the workforce on site, these protocols have possible negative effects on productivity and costs. Reduced efficiency and productivity directly translates into increased costs. These additional costs and productivity impacts have to be built into future bids. Additionally, these new necessary worker protections may inject new life into the power of unions. Will this be the rebirth of union strength in certain parts of the country?
  4. Material Procurement: The pandemic has slowed and shut down factories throughout the world. This has caused a scarcity of raw materials and equipment, causing increasingly long lead times and higher costs. It is unclear when the supply chain will recover. These factors need to be accounted for when developing schedules and budgets. You should consider going beyond your regular suppliers, and engage new and multiple distribution chains and suppliers, and even enter into long-term supply contracts to protect yourself from price swings.
  5. Legal Notices/Contractual Issues: The pandemic exposes (no pun intended) contractors to new and different claims and disputes related to COVID-19 You must thoroughly review your contract to assure you provide timely notices of all time and cost impacts, and comply with all claim documentation requirements. Additionally, as noted above, the pandemic has caused a significant increase in contract terminations and force majeure delays. You must understand what you can and cannot recover  under your contract, and make sure you document your claims well and make all timely submissions.
  6. Health Insurance and Paid/Unpaid Medical or Family Leave: Local, state and federal responses to the pandemic have impacted the health care and leave benefits provided to workers. A flurry of new initiatives provide paid and unpaid medical leave related to COVID-19 exposures, mandatory quarantines and child and family care requirements. The conflicting requirements among overlapping local, state and federal mandates have created conflicts between employers, unions and benefit providers as to who is the responsible party to cover the additional costs of medical testing and leave. Having an understanding of all insurance policies, coverages, union agreements and your obligations as an employer is vital. It is critical that you take a team approach to assuring compliance with the myriad of benefits.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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