Will Contractors Be Liable For Coronavirus Construction Delays?

As Americans come to grips with the full scope of the coronavirus, the construction industry is realizing that many ongoing projects could be delayed and disrupted for months, if not suspended altogether.

Day by day, as the impact from the coronavirus grows, the resultant financial damages will increase exponentially. But the question of who bears the cost of the coronavirus impacts will likely remain a point of contention between owners, contractors and subcontractors for years. In the worst cases, those disputes could devolve into protracted legal battles.

Owners and developers will potentially be able to recover some of their losses through their business interruption insurance. Contractors and subcontractors, however, have fewer avenues to recovery.

"It's going to come down to the exact wording of the contract — does it generally refer to 'causes beyond the contractor's control' or does it specifically mention epidemics?" said Secretariat Managing Director Ted Scott, whose firm specializes in resolving construction disputes. "Contractors and subcontractors should check their contract clauses regarding claims, notice, schedules, delays, force majeure and safety."

Even in the most standard construction agreements, numerous provisions could present legal and financial challenges and hold contractors liable for delays and damages.

Contractors should pay particularly close attention to respective notice provisions, Secretariat Managing Director Meera Wagman said. If they fail to properly notify another party within the stipulated time period, their right to an extension of time and resultant damages might be waived. Wagman added that the notice should reserve rights to both additional time and money and not limit the contractor's potential remedies.

Even if a contract includes a force majeure clause, more often than not, the contractor is only entitled to an extension of the contract time, not to any additional compensation. Owners and developers may also attempt to enforce "no damage for delay" clauses, which exempt them from having to pay any damages to contractors for delays caused by any reason. While these can be overcome under certain circumstances, Wagman said the burden of proof falls on the contractor.

Wagman's advice for contractors, owners and subcontracts alike, is to properly document the status of the project at the outset of the impact, implement a risk management plan, and keep an accurate and detailed account of events and costs incurred during the impact period. 

"Different types of costs will face different entitlement challenges," she said. "The key is to separate and discretely track these costs to allow greater flexibility and opportunity to recover."

Contractors may also be required to show that costs were reasonably incurred and efforts were made to mitigate costs during the impacted time period. Costs that could have been reasonably avoided or mitigated, such as replacement of damaged materials due to improper storage, may be excluded.

"Contractors should pay close attention to the direct consequences of the coronavirus impact, say, a project shutdown, and segregate any ongoing impacts which persist after resumption of work such as continued loss of productivity, lack of available skilled labor and lack of materials," Wagman said. "In addition, costs should be tracked for any acceleration efforts that are implemented after work is resumed."

Even before the coronavirus began to spread across the U.S., contractors were bracing for disruptions and delays on another front: mraterials from China. Commercial contractors import tens of billions of dollars' worth of materials from China every year, and as the outbreak began to shut down the country's factories, a disruption of the supply chain was unavoidable. 

China is now heading back to work, but contractors could still face delivery delays and higher price tags on their materials thanks to lingering effects of the coronavirus, Scott said. The virus has already delayed deals of ongoing construction projects, including the $1B sale of the incomplete Oceanwide Center in San Francisco.

The more pressing concern now, though, is a shortage of available labor. With employees across all industries being asked to stay home, coupled with government shutdowns of construction projects, progress on the nation's building projects could grind to a halt. 

"We're already seeing many contractors start to put in claims notices concerning the potential impact from the coronavirus," Scott said. "We've seen these kinds of notifications and preparations before, as in the case of the SARS scare, but this may be the first time we see the impacts actually materialize in the United States."

Determining entitlement to recovery is only the start of the process. The real problem will be quantifying and proving the impact. Scott predicts that as the industry recovers from the current crisis, contractors whose projects might have been in trouble before the outbreak will attempt to blame all delays on the virus.

"The question now becomes, 'Was all the delay caused by the coronavirus, was the project already in delay before the coronavirus hit?'" Scott said. "Owners and contractors should be evaluating their projects as soon as possible, as this will serve as the benchmark from which all delay and disruption impacts will be measured going forward." 

How well impacts are documented and supported in the coming months will be directly tied to a contractor's ability to successfully recover their damages, Wagman said. To avoid expensive and lengthy legal battles, Secretariat analyzes projects in both a dispute-driven forensic manner and in real time. The goal, Wagman and Scott agreed, is to identify a problem at the earliest stage possible so it can be dealt with efficiently and cost-effectively for all parties.

This feature was produced in collaboration between the Bisnow Branded Content Studio and Secretariat. Bisnow news staff was not involved in the production of this content.