Who Will Bear the Risk and Cost for Coronavirus Construction Delays? A Contractual Analysis
As the Coronavirus spreads across the globe, its impact continues to disrupt many industries, including construction. Over the last twenty years, the construction industry in the United States has substantially increased its reliance on China as a supplier for all types of construction materials including electrical and lighting equipment, elevators and component parts, plumbing fittings and fixtures and HVAC equipment.
Production lines in China are standing still while workers are quarantined or huddling in place in their homes. Shipping containers with raw materials are backed up in China’s ports and there is no transportation to deliver finished products from factories. These supply chain shutdowns have already created increased demand for construction materials in the United States and have the potential for causing substantial construction delays and project cost overruns.
Cary Davis, an official with the American Association of Port Authorities said that “Due to the coronavirus outbreak, cargo volumes at U.S. ports might be down by 20 percent or more on a year-on-year basis compared to 2019.” An executive at national home builder Toll Brothers complained that the virus has already delayed certain lighting parts and small appliances. https://www.reuters.com/article/us-toll-brothers-results/toll-brothers-says-11-home-sales-in-california-impacted-by-coronavirus-idUSKCN20K2P9.
While there can be no question that the outbreak of the Coronavirus in China was unforeseeable, the party who bears the risk and the loss for resulting construction delays will be dictated by the controlling written agreement. The force majeure clause must be examined to determine if the virus outbreak constitutes an excusable delay extending the completion date and excusing the contractor from liability for any applicable liquidated or actual damages. Any provisions governing the contractor’s ability to seek compensation for excusable delays also come into play.
The contractor would likely be granted a time extension under the AIA’s standard form A201 General Conditions, which contains the following force majeure clause:
8.3.1 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, or of an employee of either, or of a separate contractor employed by the Owner; or Separate Contractor; (2) by changes ordered in the Work; or (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or, adverse weather conditions documented in accordance with Section 126.96.36.199, or other causes beyond the Contractor’s control; or (4) by delay authorized by the Owner pending mediation and arbitration; or binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines may, justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine. (Emphasis added.)
It would be very difficult for an owner to dispute that the virus outbreak’s disruption to the supply chain was somehow within the contractor’s control. However, force majeure clauses are often revised from their native form, transferring the risks of the unknown to the contractor. For example, the following force majeure clause appeared in an agreement recently presented by a large developer to a contractor for execution:
Delay. Contractor shall take all necessary actions required to remedy any delay due to the fault of Contractor or anyone furnishing labor, materials or equipment under Contractor, including, without limitation, providing additional forces to perform the Work, or working overtime at Contractor’s sole cost and expense. Owner shall also have the right to supplement Contractor’s forces, without termination of this Agreement, in the event Contractor fails to take the measures set forth above for curing Contractor’s delay in performing the Work, the cost of which shall be deducted from any amounts otherwise due Contractor hereunder. Contractor shall be responsible to Owner for damages resulting from delay caused by Contractor or anyone furnishing labor, materials or equipment under Contractor. Contractor shall be entitled to a time extension for all delays in the critical path activities of the Work caused by Owner, or other events beyond the reasonable control of Contractor, and such extension of time shall constitute Contractor’s sole and exclusive remedy for damages caused by such delay.
This provision does not provide the Contractor with any right to a time extension or compensation for delays relating to disruptions in the supply chain as a result of the virus. Placing aside the Contractor’s ability to recover its costs for such delays, without a time extension, the contractor could also be subject to liquidated damages or the owner’s actual damages.
Even if a time extension is granted, whether it is compensable will turn on whether the contract has a “no damage for delay” provision or other clauses limiting the contractor’s compensation for delays. Many such clauses will limit the contractor’s compensation for delays to its direct general condition costs or to an agreed-upon in-advance unit price for daily general condition costs.
A strategy for limiting delays from the outbreak may be to try and substitute materials or equipment manufactured in China with products made in the United States. Demand for these substituted materials already has already driven up costs. Standard form construction contracts permit substitutions under certain circumstances where there is also a cost savings to the owner. As such, any increased costs for a substituted product are usually the sole responsibility of the contractor.
For example, the AIA A201 General Conditions permit the Contractor to make substitutions only with the consent of the Owner, after evaluation by the Architect and in accordance with a Change Order or Construction Change Directive, which would be issued at the Owner’s discretion.
A contractor may attempt to seek compensation for increased costs associated with the high demand for specified materials or for a proposed substitute. These requests are at the Owner’s discretion unless there is a price-escalation clause permitting recovery for such costs. Although there is no provision in the A201 providing the Contractor with a right to recover escalation costs, the AGC ConsensusDocs cost-adjustment clause, § 200.1, Time and Price Impacted Material Amendment 1 (2007, Revised 2011), is a good example of a cost-adjustment clause permitting such recovery.
With the AGC clause, the parties agree upon baseline prices for certain materials when the contract is signed. If market prices increase, either party would be entitled to an equitable adjustment. The Contractor would also be entitled to an extension of time and payment for costs associated with any delays.
Whether you are negotiating a contract for a new project or in the middle of construction, it would be wise to consider who will bear the risks and costs associated with the still evolving Coronavirus.