COVID-izing Your Construction Contract

INTRODUCTION 

Those entering into new construction contracts should include custom language addressing the parties’ respective rights and responsibilities related to COVID-19. Many articles and webinars have focused on how traditional contract clauses in existing contracts may respond to COVID-19  issues. The fit is not always clear.  

Some guesswork is involved and creativity is called upon as square pegs are coaxed into round holes. While there is a need to perform that retrospective analysis to assess how COVID-19 issues will play out under existing contracts, there is no need to propagate uncertainty in new contracts.  Indeed, such uncertainty can cause parties to shy away from new contracts or include significant contingencies, neither of which supports an industry trying to recover from the pandemic. 

Is there a need now in this prolonged COVID-19 pandemic to express conditions in these  construction contracts and proceed with the projects with more clarity and mitigate the risks of the  COVID-19 event?

This article addresses custom COVID-19 language for new construction contracts. The principles  discussed can be applied to any construction contract. This article is based on two positions, one  as a developer and the other as a contractor.

CLAUSES AND ISSUES 

Definitions  

Just like a building needs a solid foundation, new COVID-19 language in a contract should start  with key definitions on which the parties’ rights and responsibilities will be built. Four terms to  define upfront would be the COVID-19 event itself, COVID-19 Acts & Bills, specific COVID-19  Terms & Condition, and Unknown COVID-19 Conditions. 

Everything ties back to COVID-19, so define that term first. Consider a definition that includes  both the virus and the disease it causes, such as: “The 2019 novel coronavirus and the disease it  causes are collectively referred to herein as COVID-19.” 

Next, pick a term, such as COVID-19 Bills & Acts, to capture the orders, directives and guidance  concerning COVID-19 that have been issued, and which may be issued, by the Government bodies with jurisdiction over the project. Those orders, directives and guidance may require the  project to shut down or otherwise increase the contractor’s cost or time of performance by calling  for things such as SOP Compliance, social distancing and the use of personal protective  equipment. Having a term for that collection of orders, directives and guidance is helpful when  allocating the parties’ rights and responsibilities pertaining to them. 

Finally, define a set of related terms, COVID-19 Terms & Condition and Unknown COVID-19 Terms  & Condition. Define a COVID-19 Condition as something attributable to COVID-19 not caused by  the parties and beyond its control. The definition should list specific items, such as COVID-19  terms and supply chain disruptions due to COVID-19, and include a catchall, such as, “other  circumstances concerning COVID-19 not caused by the parties and which are beyond its control.” 

An Unknown COVID-19 Terms & Conditions adds a time component. Define it as a COVID-19  Condition the contractor did not know about, and reasonably should not have known about, as of  a certain time, such as when the contract or a lump sum price is signed. Consider stating COVID 19 terms and conditions issued at least 10 days before a contract is signed are not an Unknown  COVID-19 Condition. In other words, the contractor will be deemed to have knowledge of those  COVID-19 Terms. 

The nesting of the definitions, culminating in an Unknown COVID-19 Condition, is very  important. As discussed in the following sections, in order to be entitled to any relief, the  contractor must demonstrate an issue constitutes an Unknown COVID-19 Condition. This is  based on the principle that if the contractor knew, or reasonably should have known, about the  issue when it signed the contract, then it should have accounted for it in the price and schedule.  Tying into that principle, if a COVID-19 Condition arises after the contractor submits its bid or  proposal, it should be allowed to revise the same due to that condition up until the time it signs  the contract. Language to that effect should be included in the contract and procurement  documents accordingly.

Delay 

In many construction contracts, one of the criteria for an excusable delay is it must be  unforeseeable. Contractors may be concerned that in new contracts all delays related to COVID 19 will be deemed to be foreseeable because the parties were aware of the COVID-19 pandemic  when they signed the contract. This is the type of uncertainty that can arise if standard clauses are  not clarified. An equitable approach is to focus on the specific COVID-19 issue that caused the  delay, rather than the pandemic as a whole. In that regard, clarifying language should be added to  the contract stating, with respect to a COVID-19 Condition, only an Unknown COVID-19  Condition is deemed to be unforeseeable. That strikes a fair balance. If the contractor did not  know about, and reasonably should not have known about, the COVID-19 Condition when it  signed the contract, it will be deemed to be unforeseeable and something for which the contractor  can pursue a time extension. The Developer is also protected because the contractor will not be  able to seek a time extension based on a COVID-19 Condition it knew about, or reasonably should  have known about, when it signed the contract or GMP amendment. 

If the contractor is entitled to a time extension for an Unknown COVID-19 Condition, the next  issue to address in the contract is whether that time extension is compensable. One approach is to treat this type of delay the same way the contract treats force majeure delay. For example, if the  contract states only delays caused solely by the owner are compensable, then clarify that even if  the contractor is entitled to a time extension due to an Unknown COVID-19 Condition, the time  extension is non-compensable. On the flip side, if the contract affords the contractor  compensation for force majeure delay, then clarify that if the contractor is entitled to a time  extension due to an Unknown COVID-19 Condition, the time extension is compensable. 

Directed Suspension 

The Developer may want to suspend work at the project site due to COVID-19 health concerns  even though the contractor is allowed to proceed with the work based on COVID-19 Terms. This  may be more likely for sites partially occupied by the Developer during the course of construction.  If the contract provides the owner the right to suspend the work for its convenience, then one  approach is to add language that describes this type of a suspension and states it will be deemed  to be a suspension for the owner’s convenience with the contractor having the corresponding  remedies stated in the contract for such a suspension. If the contract does not allow the owner to  suspend the work for reasons other than the contractor’s breach, then consider adding a new  section specifically addressing the owner’s right to suspend work due to COVID-19 health  concerns and the relief to which the contractor is entitled for that suspension. 

Compliance with COVID-19 Bills & Acts 

Include a section that states the contractor is required to comply with COVID-19 Bills & Acts in  the performance of the work. This is true irrespective of when the COVID-19 Bills & Acts are  issued. The timing of their issuance (before or after the contract is signed) will affect whether the  contractor is entitled to an equitable adjustment for such compliance, but not whether compliance  is required.

Another issue to address in this section is whether, and to what extent, the contractor should be  responsible for its subcontractors and suppliers complying with COVID-19 Bills & Acts. At a  minimum, it is fair for the contractor to be responsible for its subcontractors and suppliers  complying with COVID-19 Bills & Acts while they are on the project site. However, should it also  be responsible for them complying with COVID-19 Bills & Acts while they are off-site?  

Consider a group of subcontractors who pool together and take a van to work in violation of applicable social  distancing guidelines. One of those workers becomes infected with COVID-19 and comes to the site, resulting in a  suspension of all site activity while a deep clean is performed. Should the contractor be responsible for that delay?  How do we know if that conduct resulted in the worker becoming infected? How do we know that the site had not  already been infected by others? 

As a general principle, the contractor is responsible for the acts and omissions of its subcontractors  and suppliers as it pertains to their performance of the work. Defective work is one example.  Consider the van example above. However, instead of violating social distancing guidelines, the  driver was pulled over for speeding and arrested, which resulted in a delay to the project because  the workers never showed up at the site that day. Would the contractor be responsible for that  delay resulting from off-site subcontractor conduct? A final example to consider is a contractor’s  supplier whose factory is shut down because the workers in the factory were not following social  distancing guidelines and became sick. The supplier is late in supplying the equipment the  contractor ordered, which delays the project. Should the contractor be responsible for that delay  because its supplier did not abide by COVID-19 Bills & Acts? 

The extent to which the contractor should be responsible for its subcontractors’ and suppliers’  off-site compliance with COVID-19 Bills & Acts is an issue the owner and contractor may view  very differently. Putting those differences aside, and even if one agreed in principle that the  contractor should be responsible for such compliance, the impracticality of the contractor policing  its subcontractors’ and suppliers’ off-site conduct may result in a significant increase to its price  for that effort and risk. Therefore, the owner should perform a risk-reward analysis. The outcome  might be that the price premium is not worth it. However, that issue may be resolved if addressed in the contract.  

Wrestling with an issue upfront before the ink dries is better than first confronting it after the pages have curled  with age. 

Compensation for COVID-19 Costs 

The last significant issue to address is the contractor’s right to be paid for COVID-19 costs,  including, but not necessarily limited to, price escalation due to COVID-19 supply disruptions and  the cost of complying with COVID-19 Bills & Acts. This critical language should strike a fair  balance to achieve the twin goals of dissuading contractors from including excessive COVID-19  contingencies in their lump sum proposals, and encouraging developers to commit their funds to  new projects. 

First, identify the criteria for compensation. For example, the cost must: (i) be solely attributable  to an Unknown COVID-19 Condition; (ii) be reasonable under the circumstances; (iii) not be the  result of the contractor’s failure to comply with the contract documents or a COVID-19 Bills & 

Act; and (iv) not be the result of a subcontractors’ or suppliers’ failure to comply with a COVID 19 Bill & Act while on site (and, as discusses above, perhaps while off-site as well). You can refer  to a cost that satisfies those criteria as an Unknown COVID-19 Cost. Second, state the owner will  reimburse the contractor for costs attributable to COVID-19, and which are not included in the  schedule of values, only if the cost is an Unknown COVID-19 Cost. As with a time extension for  delay, this strikes a fair balance and hinges on what the contractor knew, and reasonably should  have known, at the time it signed the contract. Third, if your contract is based on a lump sum that  includes a construction contingency, you might address whether that contingency will be the first  source of funds for an Unknown COVID-19 Cost, with a change order to follow only if there is  a shortfall. 

Organization of New Language 

You have two options concerning how you organize the new COVID-19 language. You can  disperse it throughout the contract on a topical basis. For example, you can include the COVID 19 delay language in the delay section of the contract. Alternatively, you can add a new article to  the contract for COVID-19 and include all of the new language there. The second option is  preferred for a few reasons. First and foremost, it is easier to comprehend and apply the language  when it is in one place. This is especially true due to the nesting of the definitions. Further, from  a drafting and negotiating perspective, it is more efficient to add the language in a new article, and  it is easier to edit and pass drafts back and forth when the language is in one place. If your contract  includes separate documents for the agreement and general conditions, include the new COVID 

19 article in the document that has the higher priority in the order of precedence clause. CONCLUSION 

Owners and contractors should include new language in their construction contracts specifically  addressing their rights and responsibilities concerning COVID-19. Doing so is a better option  than wondering how standard clauses might apply to the pandemic. The greater certainty created  by COVID-19 contract language should reduce upfront pricing and schedule contingencies to the  benefit of developers, and encourage the letting of new projects to the benefit of contractors. 

Shaun Kumar is the Principal of 2C Consulting, a construction claims consultancy.