Coronavirus and Construction Contracts: Who Bears The Risk?
In view of the current coronavirus epidemic, what are the implications of material supply chain disruptions and labor unavailability resulting from the epidemic under typical building construction contracts? Although the answer will always depend on the language of a specific contract, it is likely that the owner, rather than the contractor, will ultimately bear the risk.
The most commonly-used building construction contracts (as distinguished from those for public works or other types of improvements such as solar or wind energy facilities) are those published by the American Institute of Architects. The relevant provision in the AIA A201-2017 General Conditions reads:
§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by … (3) unusual delay in deliveries,… or other causes beyond the Contractor’s control; … or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
Note that the language describes the impacts on the contractor, not its subcontractors or suppliers. In typical larger building construction projects, almost all of the work is performed by subcontractors who purchase materials and equipment and employee labor. Although common sense may dictate that anticipated labor and material shortages are causes beyond a contractor’s control, arguably, the inability of a general contractor’s subcontractors to perform is not a cause beyond the contractor’s control because the contractor is in the business of assuming the risk of subcontractor performance and must attempt to engage a replacement for a subcontractor which does not perform, either due to the subcontractor’s default or due to the subcontractor invoking a force majeure provision in its subcontract. In the event of an epidemic such as may currently be occurring, the contractor may have the burden of showing that it either made a reasonable attempt to find replacement subcontractors or provide evidence that such an attempt would have been futile. A subcontractor facing the unavailability of specified materials or equipment may attempt to mitigate with substitutes that are available. The language of AIA A201-2017 is typical of contracts and gives the owner the absolute right to approve substitutions. It is likely, however, that courts would examine the owner’s reasonableness in fulfilling its common law duty to attempt to mitigate its damages.
Other contract forms published by prominent building trade groups explicitly identify epidemics as a basis for force majeure extensions. The Design-Build Institute of America DBIA Document No. 535, Standard Form of General Conditions of Contract Between Owner and Design-Builder, defines Force Majeure Events entitling a Design-Builder to an extension of the contract time as “those events that are beyond the control of both Design-Builder and Owner, including the events of epidemics, … and other acts of God.” (Section 1.2.8). The ConsensusDocs General Conditions also has a broad definition of force majeure events entitling the “Constructor” to an extension of time which specifically references epidemics. (ConsensusDocs 200 2019 Section 6.3.1)
Under the AIA A201-2017 General Conditions, the contractor has the burden of proof in asserting a claim for an extension of time. Notice of a claim must be given within 21 days after the “occurrence of the event” (§22.214.171.124) and must be accompanied by an estimate of cost and of probable effect of delay on progress of the Work, and in the case of continuing delay only one claim must be made (§126.96.36.199). Note that A201-2017 does not include language providing that a failure to timely give notice of a claim for a time extension constitutes waiver. Courts may not enforce such a provision absent a showing of prejudice to the owner resulting from the failure to give timely notice.
Among the provisions in a contract that will result in different results in terms of entitlement to a time extension is the language used to describe the delay. The AIA language refers to a delay in the “progress of the Work,” which could be interpreted to mean any delay, even if in a portion of the Work not on the critical path. This provision is sometimes modified to require the contractor to show critical path delay or even delay in substantial completion. If the contractor is only entitled to an extension of contract time if a force majeure event delayed substantial completion, then it will not be able to do so until substantial completion has actually occurred.
Some contracts include language requiring the contractor to continue to perform pending resolution of a claim while others do not address the issue or explicitly permit the contractor to suspend work pending resolution of a claim involving an estimated additional cost in excess of a threshold amount.
Note that the AIA A201 General Conditions do not address the issue of additional compensation due to a force majeure delay in completion. In contrast, ConsensusDocs 200 General Conditions Section 6.3.1 explicitly identifies only certain causes entitling the Constructor to additional compensation for costs incurred due to delays, i.e., those caused by the owner, its design professional or “Others” under the owner’s control, and therefore excludes other enumerated force majeure events such as epidemics. ConsensusDocs publishes a document that may be used as an addendum to a contract, ConsensusDocs 200.1, Time and Price Impacted Materials Amendment and Schedule A, which explicitly addresses the issue of cost increases arising from specific causes identified by the parties, such as tariffs, and provides language adjusting the contract sum based upon changes in prices based on objective indexes.
A possible source of financial protection for uncertain events in construction is insurance. Unfortunately, typical builders risk insurance policies only cover direct physical loss or damage to the work. Coverage is often expanded to cover business loss and even increases in construction costs, but the covered causes of loss are almost always limited to physical loss and do not include epidemics.
As the current disruption continues and its ultimate extent remain unknown, in addition to the practical considerations for mitigating risk of all construction project participants, the first step in understanding the legal implications is to review by which the participant is bound. For owners, this will be the construction contract, and don’t forget any construction loan agreement and related completion guaranties, conditional use permits and even building permits which may have expiration or other milestone dates. For contractors, in addition to the owner/contractor agreement, there will be subcontracts and purchase orders. Contractors and subcontractors should maintain detailed records of the sources of any shortages of labor, materials or equipment, the impacts of such shortages on construction progress and any attempts to mitigate. As a matter of concern to both owners and contractors, builders risk insurance policies typically have expiration dates and extensions of such dates may be quite expensive.