The novel coronavirus (COVID-19) pandemic has and will continue to have profound effects on the development and construction industries. There have been and will continue to be substantial delays and cost impacts as a result of disruption to supply chains, the unavailability of workers and financial impacts disrupting payment. In addition, many states, including Pennsylvania, have now issued orders directing non-essential businesses to cease operations and individuals to stay at home. For developer/owners, it is imperative that you understand how your contracts allocate the risk of delays and shut downs, as well as your and the contractors’ options regarding the suspension or termination of the work.
Delay, suspension and termination each present separate scenarios with different effects and legal obligations and consequences. Moreover, who suspends or terminates the work – the owner, contractor, or government – and under what circumstances and pursuant to which contract provision, also implicate different rights and obligations.
Delay. Even in those locales where the state or local government have not issued stop-work or stay-at-home orders, the Covid-19 pandemic is likely to disrupt and delay construction. In normal times, and depending on the cause and extent of the delay, the result may be that the contractor is entitled to an extension of time and/or delay damages, or the contractor faces liability to the owner for liquidated or actual damages if the delay is not recovered and the project does not complete on time.
Entitlement to compensation (delay damages) is dependent upon the contractual allocation of risk and whether the delay is “excusable” or “inexcusable” and “compensable” or “noncompensable.”
- Excusable delays are those that are caused by factors beyond the control of both the owner and the contractor; examples include weather, acts of God and strikes. In cases of excusable delays, the contractor is entitled to an extension of time but no additional compensation.
- Inexcusable delays are delays caused by or for which the contractor is responsible. Inexcusable delays do not entitle the contractor to an extension of time or additional compensation, and may expose it to liability to the owner for actual or liquidated damages.
- A compensable delay is any delay to the project caused by the owner and/or its agents (i.e., the architect). In cases of compensable delay, the contractor is typically entitled to both a time extension and additional compensation for damages such as extended overhead and job site costs, equipment standby costs, wage escalation and extended supervision.
“Force Majeure.” A force majeure event is one that is outside the control of a party and prevents it from performing its contractual obligations. While many contracts include “force majeure” clauses, the specific language and, as a result, the applicability to particular events or circumstances can vary. The consequence of invoking the clause can also vary.
Some contracts, most notably the AIA documents, do not use the term at all, and “force majeure” events are simply treated as excusable delays. Section 8.3.1 of the A201 General Conditions simply includes “labor disputes, unavoidable delays in deliveries, adverse weather conditions, or ‘other causes beyond the contractor’s control’” among those delays for which the contractor is entitled to an extension of time. Whether the contractor is also entitled to additional compensation is dependent upon the often revised language of §8.3.3 and, most notably, the inclusion or absence of a “no damages for delay” clause.
Other contracts provide separate express ‘’force majeure” provisions, which detail the timing and content of the required notice, and allow for varying degrees of relief – from suspension of the work during the event and a corresponding extension of time, to compensation for costs incurred to address the event itself, to “delay damages” such as extended overhead and general conditions.
Government-Ordered Work Stoppages. While gthe overnment’s orders expressly or effectively stopping the work may be considered a “force majeure” event under some contracts, other contracts separately address such orders and provide for particular procedures, rights and obligations. For example, §14.1.1 of the AIA 201 General Conditions provides that the contractor may terminate the contract if the work is stopped for more than 30 consecutive days as a result of the issuance of an order of court or other public authority, or by act of government such as a declaration of a national emergency. Section 14.1.3 further provides that if the contractor exercises its right to terminate under §14.1.1, it is entitled to be paid for work performed, costs incurred as a result of the termination, plus overhead and profit on the work not executed (i.e., the remaining contract work).
Suspension of Work. Virtually all construction contracts give the owner the right to suspend the work for its convenience for as long a period as it deems necessary. While this right is often subject to the contractor’s right to terminate if suspension of the work, in the aggregate, totals a specified number of work days within a specified calendar period, it may allow the owner to preclude the contractor from terminating in response to an extended delay, such as a government stop-work order; at least for a period of time. In some circumstances, suspension may provide a measure of protection against otherwise recoverable delay costs such as extended general conditions, overhead and stand-by costs, as during the period of suspension the contractor (theoretically) may take action to mitigate its overhead and stand-by costs. Suspension does not come without cost, however, as the contractor will typically be entitled to an equitable adjustment to the contract to account for any increases in the cost of the work in the interim (e.g., labor and material cost escalation), possibly including adjustments to profit and overhead. When considering suspension in the event of a government-ordered work stoppage or force majeure event, owners must carefully review and compare the contractor’s rights and entitlement to compensation under the respective scenarios.
Termination for Convenience. While the contractor may have the right to terminate the contract as a result of an extended delay or shut down due to government action or owner suspension, the owner typically maintains the right to terminate the contract for its convenience – meaning at any time and for no reason. In addition, the compensation to which the contractor is entitled in the case of termination for convenience may differ from that to which it is entitled if the contractor were to exercise its right to termination.
Termination for convenience clauses often favor the owner and expressly provide that the contractor is entitled only to be paid for work performed prior to termination and reimbursement for “termination costs,” which may be agreed to up front and liquidated in the form of a specified “termination fee.” There are several caveats of which owners considering termination for convenience must be aware, however, such as the effect on any bonds and insurance, and whether the subcontracts are assignable in such circumstance.
Conclusion. These are unprecedented times the decision whether to ride out a work stoppage, declare a suspension or even terminate the contract is made more complicated by the uncertainty as to what the commercial and practical options to complete the project will look like once the work is able to resume. No one knows how long the current crisis will last, which companies and projects will ultimately survive and what the marketplace will look like on the other side. To best navigate these troubled waters, owners must first understand their options under the contracts for construction and the associated costs and potential consequences.