COVID-19’s Impact on Construction Contracts
By Michael E. Catania
COVID-19 has altered the very framework of construction projects and their underlying contracts. Orders relative to what are essential business and/or projects, virus mitigation rules and social distancing best practices seem to change on a weekly, if not daily, basis. With all of this going on, the last thing a Contractor may be contemplating is how to it can preserve and protect its contractual rights for delay damages or extras caused by this pandemic. Below are a few helpful guidelines based off of the AIA’s A201, General Conditions that are used on many jobs here in the North East. Please note, the following assumes an unaltered version of A201 2017. Owner’s and their counsel tend to heavily revise the general conditions so please pull the actual terms referenced below and make sure they have not been altered.
1. I am worried about getting paid
a. Given the pandemic’s impact on the economy, and in particular certain industries, you may be worried that your once flush Owner is no longer liquid enough to meet his/her payment obligations on the project. If your project is controlled by AIA’s A201, then you can look to section 2.2, “Proof of Financing” for some reassurance. This clause requires an Owner, in response to a written request by a Contractor with a “reasonable concern,” to furnish “reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations.” If a Contractor makes such a request, and the Owner ignores it, the Contractor is permitted to stop work.
b. In addition, and under sec 9.7, non-payment by the Owner is also grounds to stop work and for the contract time to be extended.
2. I am worried about delays and possible Liquidated Damages
a. Take a look at section 8.3. If it was not modified, it allows for delays for “causes beyond the Contractor’s control.” In fact, where such a cause is present, the contract time “shall be extended for such reasonable time as the Architect may determine.”
b. COVID-19 delays can fall within Section 8.3.1, thus entitling the contractor to more time. Examples might include building permit delays due to lack building inspectors or a Covid-caused backlog, unusual delays in the delivery of construction material, or labor delays caused by the inherent inefficiencies in the social distancing mandates on construction sites. Frequent time-outs for cleaning, coupled with the extra time it takes workers to put on and take of PPE after every break, can waste hours over any given work week.
c. This section does not talk about delay damages (and is frequently revised by owners to preclude them).
3. My Job has been suspended due to Governmental orders; can I terminate?
a. Section 14.1.1 allows a Contractor to terminate the Contract if the Work is stopped for a period of 30 consecutive days, through no act or fault of the Contractor (or any of its Subcontractors/suppliers). As a result of:
i. Issuance of an order of a court or other public authority having jurisdiction that requires all Work to be stopped;
ii. An act of government, such as a declaration of national emergency, that requires all Work to be stopped.
b. As you are all aware, some projects have been suspended by Executive Orders as “non-essential.” If you are on a suspended job, and it has lasted more than 30 days, contact your construction attorney for guidance on whether and how to terminate. This is especially true if you fear the Owner will force you to accelerate once the suspension is lifted, or that your profit on the job will be eaten away by material price increases.
c. If you terminate under Section 14.1.1, and per Section 14.1.3, you will also be entitled to lost profits on the yet to be completed portion of your Work. Again, check your contracts carefully as Owners typically will have modified these provisions. There are also certain notice and claim provisions that must be strictly followed. If not, your termination may be held unlawful.
Michael E. Catania with the firm of Catania, Mahon & Rider, PLLC, email@example.com