Construction Contracts in the Time of COVID

The global COVID-19 pandemic has brought unforeseen and unprecedented challenges for the business world, include the construction industry. Construction projects have been negatively affected by significant work delays and stoppages, worker safety and illness concerns, supply chain interruptions, price increases, and other unexpected events.

These difficult times require that parties involved in the construction industry manage and properly prepare for the risks related to COVID-19 and its widespread impacts. Parties must review their existing contracts to determine how delays are addressed and future contracts must address COVID-19 uncertainties.

I. Existing Contracts

The two main questions for reviewing an already-existing contract are: (1) Does the contract have a force majeure clause; and (2) if so, does COVID-19 fall under the clause?

1. Does the Contract have a Force Majeure Clause?

A force majeure contractual clause commonly refers to natural and unavoidable catastrophes that affect contract performance. A force majeure clause is intended to address the situation where an unforeseeable event occurs that is beyond the control of the parties. Generally, a force majeure clause entitles a contractor to additional time in the even that an unforeseen event causes a delay, but many clauses do not provide for additional compensation. Standard contractual provisions, such as Section 8.3.1 of American Institute of Architects (“AIA”) 201-2017, contain delay clauses that provide for excusable, non-compensable time extensions. Although not specifically titled a “force majeure” clause, the Section 8.3.1 states:

If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

2. Does the Force Majeure Clause Address COVID-19?

Notably, the language of Section 8.3.1 quoted above does not specifically address pandemics, epidemics, or quarantines. However, the less specific subparagraph (5) of Section 8.3.1 arguably may address project delays caused by COVID-19. Under Section 8.3.1, a contractor must show that the “other causes” justified the delay and that the final determination of whether the delay is justified. In order to successfully set forth an “other causes” justification argument for COVID-19 related time delays and a request for an extension of reasonable time, it is imperative that a contractor fully and in detail document how events arising from or relating to the COVID-19 pandemic (i.e. supply delays, business closures, travel and quarantine restrictions, worker illness) were the causes of the delay. Importantly, Section 8.3.1 only entitles a contractor to additional time; the clause does not provide for any additional costs adjustments or price increases caused by the delay.

For other non-AIA contracts, contractors should review for applicable provisions, and determine whether there are any notice obligations and the contractor’s rights and remedies in the event of a delay. Some contracts may reference an “acts of God” as an excusable delay. However, the definition of “acts of God” varies from state to state, with some states narrowly defining “acts of God” as something caused by nature, whereas other states define “acts of God” more broadly to include events such as wars and riots.

In the event that a contactor encounters a COVID-19 related delay under an existing contract, notice should be provided to the owner as soon as possible, citing any relevant contractual provisions and/or statutory/case law. It is critical that, in invoking a force majeure or similar clause, that contractor strictly comply with the contractual notice requirements (and any related notice time limits). Additionally, everything relating to the delay should be thoroughly documented in writing, keeping all necessary parties adequately informed as to the factual circumstances of the delay and/or other ramifications of COVID-19.

II. Future Contracts

For future projects and contracts, parties should very clearly delineate the rights, responsibilities, and remedies under the contractual provisions. The following issues should be addressed in any new construction contracts: (1) specifically delineated allowable causes for excusable delays; (2) whether additional time and/or compensation are available remedies; and (3) notice requirements. Contractors should be sure to address the possibility of COVID-19 impacts and delays in a specific and straightforward way. A general force majeure clause may not be sufficient, as over a year into the pandemic, it would be difficult to argue that pandemic-related delays are now “unforeseeable.”

Parties should also consider how COVID-19 will affect other important contractual provisions relating to change in law, suspension and termination, and health and safety when negotiating and drafting a new construction contract. Additionally, parties should be sure to satisfy any relevant safety and health compliance obligations in new construction contracts, including following the recommendations and practices of the CDC and HHS and other governmental agencies issuing safety regulations affecting project site access and operations. These additional health and safety duties should be defined and contractors should account for additional costs necessary for compliance.

Carefully planning ahead to address COVID-19 in future contracts will assist a contractor in properly managing risks related to COVID-19 and mitigate potential future delays and disputes. Our office has assisted our clients who are involved in the construction industry with the reviewing, drafting/or and revising construction contracts to address COVID-19 impacts.