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What Actions Should Contractors Take to Avoid Losses Due to COVID-19?

The impact of the coronavirus on the construction industry is being felt throughout South Florida. From recent suspensions on a few construction projects to a complete shutdown of the permitting/inspection department in Miami-Dade County, the challenges contractors will likely experience on their current projects during this outbreak are far from over. There are, however, steps that contractors can take to help mitigate the impact and decrease their losses.

Review the Contract.

Contractors should consider having an attorney review their contract in search of a “force majeure” clause or another clause that may allow the contractor to obtain an extension of time to perform the contract as well as the recovery of additional costs and an ultimate increase in contract price. Though a virus has never really impacted the construction industry at this level before, contractors might be able to resort to force majeure law, or other similar contract provisions, to gauge if they are entitled to file a potential claim and seek damages. Force majeure clauses are typically incorporated in construction contracts to afford contractors with relief in circumstances that are considered “acts of God,” “unforeseen events,” or “natural disasters.” A qualified construction attorney will be able to evaluate whether current conditions categorize the COVID-19 as a force majeure event and whether other contractual provisions apply and allow the contractor to make claims for additional costs and extensions of time.

Provide Clear Notice.

Have a clear understanding of the contract’s express notice provisions for communicating delays and additional costs. It is essential to use the contracts as a guide when determining time limits for giving proper notice, who must be copied on the notice, and what method of delivery is required. Typically, many standard form construction contracts require a contractor to provide notice to the owner of any delays in a timely fashion. While the situation continues to evolve rapidly with COVID-19 and no one can predict the ultimate outcome of this pandemic, all contractors should be providing notice to the owners of an anticipated delay to the project and potential impacts due to labor and material shortages, compliance with social distancing requirements and the inability or delay in obtaining inspections. Such a notice should also include a request to discuss with the owner a plan to reduce the impact on the schedule and additional costs that are expected to be incurred.

Understand Suspension and Termination Clauses.

Can an owner suspend a project even though governmental orders have not halted construction, despite the COVID-19 outbreak? The answer is: it depends on your contract. There are specific clauses that not only allow an owner to suspend a project, but also give contractors the right to terminate the agreement or seek additional compensation if a project suspension surpasses a certain amount of time.

Keep Record of Any Changes in Schedule or Costs.

Keep detailed records of all the ways the virus has impacted a project. Notate staffing changes because of COVID-19 infections, project delays caused by social distancing directives or other mandates, and any other reasons why the project has been affected. Contractors will be required to substantiate their claims for additional costs and extensions of time.

Try to Foresee Problematic Circumstances.

Though there is some defense for contractors who experience circumstances that are out of their control resulting in a disruption to their performance, there are circumstances where that defense does not apply. For example, if a contractor has the benefit of knowledge or information regarding an unforeseen occurrence, then their non-performance might be considered a breach.

It is recommended that contractors have a preparedness plan to help mitigate issues that would cause a delay or disruption. For example, contractors should have replacements in line in case any of their employees gets infected. If shortages to project labor are expected, contractors should have recruiting companies available to help fill those shortages. Contractors should also continue to review and implement job site safety procedures to prevent having the disease spread around the construction site. Providing staff with handwashing stations, ensuring that personnel maintains 6 feet of separation and monitoring that employees avoid congregating during breaks can prevent a project from being shut down for non-compliance with emergency orders. Contractors remain responsible for the means and methods of construction and for taking appropriate action to mitigate any delays and costs to the Project.

Examine Existing Insurance Policies.

Contractors should review their insurance policies to determine if they are covered for coronavirus- related losses. Business interruption clauses or supply chain risk insurance may provide coverage for the economic impact COVID-19 has had on their business.

CARES ACT – Payment Protection Program

In addition to protecting their legal rights with owners due to COVID-19, contractors are of course concerned with how to keep their business functioning and workers employed during the pandemic and economic downturn. Recently, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses such as contractors. This is known as the Paycheck Protection Program which provides 100% federal guaranteed loans to small businesses. Soon the small business administration will release details about the program including a list of lenders offering loans under the program. In the interim, contractors should 1) determine whether they are eligible to apply for a loan; 2) start gathering documents such as payroll tax filings; and 3) determine how much can be borrowed under the program as well as the contractor’s average monthly payroll costs. Many businesses will be applying for these loans and it is important for contractors to act quickly and get in line and apply for this relief.

Final Thoughts

COVID-19 has had a devastating impact on several industries across the nation—and the construction industry has not been immune to the blow. As we all continue to navigate the different challenges that COVID-19 has posed on our daily lives, and assess the damage that it has already inflicted on businesses, contractors must take precautionary steps to mitigate the impact COVID-19 can have on their current projects.

Whether a contractor is facing the impact of COVID-19 on an existing project or is negotiating a contract with an owner for a future project, we encourage contractors to contact us to ensure that their rights are protected.