Changes to the work
Almost all construction contracts have provisions allowing changes
to be made to the work. If the parties agree that a change has
occurred and agree on the additional time and/or money associated
with the change, then a change order is signed and often a
release of future claims related to the change is included. Because
COVID-19 is ongoing, the parties should agree in executing any
final change order language whether all impacts of the change
have been included (including future impacts related to COVID-
19), and draft appropriate release or reservation of rights language
in accordance with that agreement.
If there is a disagreement about entitlement or the amounts
due, the Owner (or the general contractor in the case of a subcontract)
may issue a directive to proceed with the work, with any
entitlement to time or money to be resolved at a later time. In this
event, the party seeking relief is normally entitled to its “reasonable”
costs and must keep records to document such costs. The
party issuing the change directive should be aware that the costs
and time associated with performing a change in the COVID-19
environment may be significantly more than normally would be
the case, and thus issuing an open-ended directive may result in
much higher costs than anticipated.
Compliance with laws
Most construction contracts require the contractor to comply with
applicable laws and regulations, as well as orders of local authorities,
in performing the work. For example, AIA A201 states as follows:
“The Contractor shall comply with and give notices required
by applicable laws, statutes, codes, rules and regulations, and lawful
orders of public authorities applicable to the performance of
the Work.”
COVID-19 has led to a variety of additional regulations and public
health orders (e.g., mandatory use of PPE, distancing requirements,
closing certain sites, etc.), which have had a substantial
impact on many construction sites. Because the pandemic is ongoing,
additional public health orders, laws and regulations may be
issued in the future. If the parties agree that additional compensation
is due for compliance with such orders, laws, and regulations,
specific language should be added to the contract stating that
additional compensation and time may be recovered for complying
with any new laws, regulations or orders that are issued after
the contract is executed.
Funding and payment
Payment is, of course, a critical aspect of any project. Payment
clauses in construction contracts typically identify the conditions
for, and timing of, monthly payments from the owner to the general
contractor, and then from the general contractor to the subcontractors.
If payment is not made by the owner within a specified
time, the contractor is normally permitted to stop work until payment
has been received. The contractor would then be entitled to
recover its additional costs due to the shutdown, delay and re-start
of the work.
The economic downtown and future uncertainties caused by
COVID-19 pose substantial additional risks to owners that funding
for projects may be compromised or even eliminated in some
instances. This risk also impacts contractors performing the work
and may pose particular risks to subcontractors operating under
contingent payment clauses, including pay-if-paid provisions.
These risks can be somewhat mitigated by demanding proof of
financing at the beginning of the project and requiring regular
updates on the status of financing as the work proceeds.
Suspension and termination
Like many contracts, AIA A201 permits the owner, without cause,
to order the contractor in writing to suspend, delay or interrupt
the work. In the event of such an order, the contractor is entitled
to a time extension and to recover its additional costs, plus profit,
caused by the suspension. Because of local shutdown orders and
restrictions caused by COVID-19, as well as substantial disruptions
to supply chains and financing, many construction projects have
been suspended since the onset of the pandemic. Future suspensions
may be issued for other ongoing projects as well depending
on the specific impacts of COVID-19 at the project location.
Numerous disputes have already arisen regarding the amounts
due contractors as a result of COVID-19-related suspensions, and
we expect that litigation over these issues will continue for some
time. As a result, for contractors and subcontractors, it is critical
in the event of a suspension that all potential impacts are identified,
monitored, and documented. Also, because the full impacts
of COVID-19 are still difficult to determine, contractors should
attempt to avoid suspension provisions that restrict recovery to
only specified cost categories.
The AIA documents further permit the contractor to terminate
the contract in two instances: (1) where the work is stopped for a
period of 30 consecutive days due to the issuance of an order of a
court or other public authority or an act of government requiring
the work to stopped, and (2) repeated suspensions, delays or interruptions
by the owner constituting in the aggregate more than
100% of the total time scheduled for completion, or 120 days in
any 365-day period, whichever is less. In the event of such a termination,
the contractor is entitled to payment for work executed,
reasonable overhead and profit on work not executed and costs
incurred by reason of such termination. Contractors and subcontractors
should be aware of these or similar provisions, particularly
in light of previous, and likely future, government orders
regarding COVID-19. t
Jeff Hummel is a partner with the construction practice group at
Seyfarth Shaw LLP in Washington, D.C.
References
1. American Institute of Architects (AIA) Document A201-2017,
Section 8.3.1.
2. For a state-by-state analysis of force majeure and related issues in
the context of COVID-19, see Seyfarth Shaw LLP’s 50 State Survey
of Legal Excusability: Force Majeure, Commercial Impracticability,
and Frustration of Purpose. https://www.constructionseyt.
com/2020/06/now-available-50-state-survey-of-legal-excusability/
3. AIA Document A201-2017, Section 3.7.2.
4. See, e.g., AIA Document A201-2017, Section 9.7 (If the owner does
not pay the contractor within 7 days of the date required by the
contract, the Contractor may stop work upon an additional 7
days’ notice).
5. American Institute of Architects (AIA) Document A201-2017,
Section 14.3.
6. AIA Document A201-2017, Sections 14.1.1 and 14.1.2.
7. AIA Document A201-2017, Section 14.1.3.
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