COVID-19 and the Construction Industry: How to Prepare for Potential Disputes

Every industry has been affected by the COVID-19 pandemic, and construction is no exception. While construction work has been deemed “essential” in some places it has been limited only to pandemic-related projects in others. In addition, as the virus spreads, public opinion is increasing pressure on local and state officials to limit construction activity.

In the current climate, construction companies face a myriad of new challenges, including concerns about health and safety, delays resulting from employee illnesses, supply chain disruptions and increased prices for materials, as well as contract delays or cancellations by concerned project owners. Contractors face the need to keep their employees safe and institute what could be costly best practice measures, while facing potential claims from employees if they become sick due to the company’s lack of response to the dangers of the virus.

Stakeholders in the construction process need to prepare for potential disputes and understand their rights and responsibilities. This includes understanding applicable clauses in construction contracts and subcontractor agreements as well as business interruption clauses and other provisions in insurance contracts. You may need to seek professional counsel to help you understand your rights and responsibilities in potential disputes.

Here are some steps you can take to prepare for potential disputes arising from the effects of COVID-19:

Keep your records in order. Maintaining good business and financial records will be vital in determining costs incurred by builders and potential reasons behind delays or cost overruns. This includes contracts, signed Authorization for Expenditure (AFE) forms and change orders (with supporting budgets, estimates and documentation), invoices with supporting backup, such as material invoices and time sheets, as well as internal accounting documents such as percentage of completion schedules. Project owners should keep good records of payments to contractors and any direct payments to subcontractors. Communications, including memorandums, letters and emails related to a potential claim, should also be preserved. Contractors also should file and document notice of delay with the project owners in a timely manner.

Determine whether you have a claim or whether a claim may be filed against you.  Owners may have the option of filing a delay claim. The contract will specify whether liquidated damages are applicable or if there is a basis for a claim. A fundamental issue that will be resolved in COVID-19 claims is whether construction delays fall under a force majeure clause, meaning the construction delays were excusable. The nature and responsibility of delays resulting from the disruption of the supply chain also will need to be assessed.

Contractors may have the right to file breach of contract claims if it was the project owner who delayed or cancelled a project, outside of the provisions in the contract.

In addition, employees who are getting sick are filing claims against employers for lack of due care to protect them against the virus.

Calculate your damages The calculation of lost profit damages derived from COVID-19 related delays will be particularly complex. A classical “shifting the curve” or profits delay approach will be insufficient. Unrelated market factors will need to be considered, such as the general downturn in the economy, industry specific effects and even the trend in energy prices in some situations. Delays caused by different actors may need to be identified and evaluated separately.

If project owners cancel or delay construction projects, contractors may also be able to claim losses. A lost profits calculation in this case would require a detailed analysis of the lost revenues, the cost of mitigation efforts and an assessment of whether any other factors are directly causing the contractor’s losses. It will be important to determine whether revenues are truly lost or merely delayed.

In addition, if a company benefitted or may benefit from the forgiveness provisions embedded in the CARES Act, it could affect the calculation of the costs to mitigate their lost profits.

Weaver’s forensic and litigation services professionals have experience analyzing and calculating losses or damages in conjunction with construction claims. We work with law firms that are highly experienced in these matters. For questions relating to these issues or for more information, contact us.

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