The COVID-19 pandemic and accompanying government orders restraining business operations have led to unprecedented disruption in the construction industry. In Michigan, although some critical infrastructure and health care-related projects continued during the stay-at-home order, most projects were idled until residential and commercial construction was permitted to resume on May 7. This disruption, along with accompanying disruptions in materials manufacturing and access to capital, will undoubtedly lead to disputes among owners, contractors and subcontractors regarding how to handle the resulting delays and cost overruns.
Dealing with Delays
During the initial weeks of Michigan’s “Stay Home, Stay Safe” orders, delays were inevitable and unavoidable for most projects. Owners, contractors and subcontractors should all review their contracts for provisions dealing with delay. Often, contracts will differentiate between delay caused by the owner or contractor. Most COVID-19 delays, though, have been caused by circumstances outside either party’s control—namely, a government order prohibiting work from proceeding. Many standard form contracts contain a “force majeure” provision to deal with these sorts of unavoidable interruptions, although the contract might not use those precise words. If there is no force majeure provision, terms addressing compliance with legal requirements may also provide relief. Each party should review its contracts for these provisions and note whether any notice to the other party or parties is required.
Since most work has resumed, contractors and subcontractors may now be in a better position to quantify the anticipated delay. Consider sending an updated notice to add more detail about the anticipated delays, and other issues that may have arisen since the initial notice. For example, because of factory shutdowns domestic and international, material supply shortages may cause delays beyond the initial mandatory work stoppage.
Owners should carefully review any lease agreements for the property and any loan documents that may be impacted by delays in completion. For lease agreements, review provisions that apply to the completion of construction and what rights the tenant may have to terminate the lease if construction is not completed in a timely manner. Leases may also have force majeure provisions permitting extensions in certain circumstances. Make sure all notice requirements in the force majeure clause are followed. There is no such thing as over-communication in this case.
Supply chains are being disrupted by factory shutdowns in many industries, and construction materials are no exception. These disruptions may result in significant cost increases and delivery delays for materials. Contractors and subcontractors should each review their contract documents for any terms related to material costs increases, and identify which party bears the burden of increased costs. Some contracts contain price escalation provisions that allow the contractor or subcontractor to seek reimbursement of increased materials costs from the owner or general contractor.
Mitigation of damages
Every party to a contract, construction or otherwise, has a duty to mitigate its damages when a loss occurs. A contractor experiencing material supply chain disruption should take steps to find an alternate source of supply if possible, communicate with the owner or general contractor about its efforts and document all such efforts in case of a later dispute.
Preparing for defaults
The delays and cost increases discussed above are bound to slow even those projects that did not stop completely. Not all owners and contractors will be able to withstand the disruption, and some will inevitably default on contracts or fail completely. It is critical for contractors, subcontractors and materials suppliers to ensure that their lien rights are protected. Review all projects to ensure that notices of furnishing have been properly issued, and review and follow your internal controls for tracking the tight deadlines to file your claim of lien and/or foreclose on the lien. Likewise, owners should carefully review and track sworn statements to avoid the surprise claim of an unpaid subcontractor.
Finally, all parties to a construction contract should stay in constant communication with each other regarding the status of work. All parties should also carefully document any issues related to delay, cost increases and mitigation of damages so that if a dispute does arise later, they will be well equipped to defend it. With proper communication and cooperation among all parties, many disputes can be avoided at the outset.