HKA and national law firm Dykema Gossett, PLLC recently co-hosted an informational webinar on the impacts of COVID-19 on the construction industry. The May 21 webinar, entitled “Maintaining Control: Navigating the Challenges and Impacts of the Pandemic on Construction Projects,” was offered free of charge to both HKA and Dykema clients as well as the public.
HKA partner Scott Hollingsworth, based in Chicago, was a panelist on the webinar, which was moderated by Dykema attorney Steven D. Mroczkowski. Hollingsworth was joined by Dykema member David A. Vanderhider, who is based in San Antonio. Topics covered during the 45-minute event included insight into what parties in the contracting chain can do now to document, anticipate, and mitigate the COVID-19 pandemic’s impact on projects, performance, and potential claims.
Construction throughout the U.S. has been affected by mandated social distancing and other measures to protect workers’ health. While some cities and states halted construction, it continued in others, although at a slower pace in many locations. Now, public officials and the construction industry are grappling with how to continue or resume construction while keeping workers and the public safe.
Plans for reopening shuttered businesses and construction sites are as varied as the states and cities in which they’re located. In some cases, cities are pushing for reopening while state authorities are calling for continued caution. In other regions of the U.S., states are planning to reopen, while city authorities want to maintain the strict social distancing orders they say have kept the deadly virus from spreading. Firms with construction projects in different locations are finding it difficult to keep up with the disparate and quickly evolving mandates.
The panelists started by discussing the many varied state and local orders regarding reopening, and where to turn for information and updates.
“Those orders are changing day by day, so be careful that you have the latest information available to know how you are impacted or whether you are impacted” Vanderhider advised listeners.
“Your state and local government orders are typically found on the websites of the state and local governmental agencies themselves. Those are great places to start,” Vanderhider continued. You can also look at resources offered by third parties. For example, Dykema has a COVID-19 resource page that can be accessed from the firm’s homepage, dykema.com, which contains a summary of the various stay-at-home orders throughout the country.”
Vanderhider also advised that several industry groups also offer resources. “But, regardless of whether you use the Dykema COVID resource page or any other industry resource, the definitive resource always will be the actual orders and the regulations, rather than the summaries,” he added.
Whether firms and their work are considered “essential” also can be confusing, Vanderhider said.
Many states have adopted the list used by the U.S. Cybersecurity & Infrastructure Security Agency, a stand-alone agency under the U.S. Department of Homeland Security, Vanderhider said.
“The key phrase is ‘essential critical infrastructure workers,’ [which] many of the stay-at-home orders use to identify who is essential and can work,” he said. “It doesn’t matter for this narrow circumstance what the law of your contract says. It matters where the project is located and what the state and local regulations in that area say. That’s what is going to govern when boots are on the ground.”
Contradictions between state and local orders abound. “For example, in Texas, the governor’s order loosening restrictions for businesses to open superseded more stringent local orders that were in place for many of Texas’ larger cities. In other states, though, local orders, particularly for larger cities, can actually trump the statewide orders for those specific locations,” Vanderhider said. “Make sure that you check both your state and local rules in order to determine what work is essential, what activity is permitted and, to the extent your orders conflict, find out which one controls.”
Hollingsworth said clients are reporting varying levels of impact as a result of the pandemic. “Responses from our clients in the construction industry have really been all across the board,” he said.
Some contractors and others in the transportation industry, particularly in highway construction, have been largely unaffected, Hollingsworth said, as have renewable energy projects and wind farms in particular, because the nature of those jobs allows workers work father apart than other trades.
“Other clients are seeing significant project impacts, ranging from complete site shutdowns to significantly reduced labor headcounts and impacts on the critical path,” Hollingsworth said. “We’re also hearing from clients that are having trouble getting people to come back to work.”
As a result, some clients have been forced to defer capital projects and reduce output at existing facilities due to lack of demand for the products, Hollingsworth added.
Manufacturers also have been affected. “Equipment suppliers, heating, ventilation and air conditioning and building automation systems manufacturers have had some work deferred this year,” Hollingsworth continued. “But, on the flip side of that coin, they’re telling us that they’ve got a significant increase in business, for example hospitals that are retrofitting patient rooms, or from owners that have significant change requests for modifying existing air handling systems.”
Contractors still working have increased shift work on some projects to meet distancing requirements, he added.
Owners, contractors, suppliers and other stakeholders affected by COVID-19 should begin by reviewing their contracts for guidance. “Provisions and other relevant articles from the contract will be key,” he said. “Ideally, this has been done by now but, if not, there’s no time like now to start.”
Communication also is vital to navigating COVID-19-related issues. “Communicating with all the parties involved—now more than ever—is proven to keep people apprised of impacts on the projects and the steps that parties are taking to mitigate those impacts,” Hollingsworth said.
Detailed documentation of COVID-19-related impacts is equally important, Hollingsworth said. “Ideally, documentation of the project status has been recorded at the outset of this [impacting] event. It’s very important to establish and record the project schedule, pre-event or pre-impact,” he said. “How do we do that? We do it in project schedules, taking the time to track and record with as much specificity as possible.”
Schedule input also should be sought from subcontractors, suppliers, owners and other project stakeholders, he added. “It’s a collaborative effort to get as much, and as best, information as possible in the schedule.”
Technology can help make this job easier. “You can document the status of the project with photographs or drone video footage,” Hollingsworth said. “Frequently, we’ve seen that photos and videos [can] be very helpful in the context of explaining the project status or substantiating the schedule activities that are included.”
He also advised listeners to consider, at the outset of an impacting event, the various scopes of work that may be impacted, such as procurement activities, long-lead items, or items sourced from outside the U.S.
“We’re challenging clients to do more than just list these things out,” he said. “Kick the list around among the rest of the project team, document those things as much as possible in the schedule or in a separate tracking log. And, try to tie those impacts to a specific schedule activity or item in a job cost report, so that there’s a good record established to demonstrate these impacts.”
Hollingsworth also advised staying abreast of evolving regulations and their potential impacts on the schedule. “Times are changing quickly, and it’s important to stay as current as possible, checking back in with counsel, local governing authorities and other available industry resources to stay apprised of the most current guidance,” he said. “We’re seeing guidance across the board, including recommendations on job site safety and security. It’s important to document those [resultant] changes in writing as quickly as possible, and communicate with other project stakeholders about those changes.”
“Several clients that we were working with have developed a daily COVID-19 report,” Hollingsworth continued. “This is above and beyond their reporting requirements as identified in their contracts. It is a specific reporting tool to capture notice letters, critical procurement items, staffing impacts, safety requirements and other COVID-19-related measures that are in effect, as well as the impacts to the critical path activities, impacts on long lead items, and mitigation steps being taken to help to minimize the impact of COVID-19.”
“We’re encouraging clients to document these items and as much as possible, tie them to specific scopes of work, specific line items and job cost reports,” he added. “It remains to be seen whether these added costs and additional time increases are recoverable, but it’s far better to have these things documented now than look back on a project at the end with a significant delay or a cost overrun and have no documentation or sparse documentation to help support a potential claim.”
Cost impacts also require careful consideration and documentation, Hollingsworth said. “If there are additional personal protective equipment that’s required, or other discrete impacts, it’s good practice to capture those as much as possible. And, consider [other cost] impacts, such as expediting materials from overseas.”
Hollingsworth also advised tracking daily installation quantities, and recording labor hours and equipment usage during an impact period. “Have a good set of data that could potentially be used, and later analyzed, to help quantify these impacts,” he said.
That same documentation will be just as important once the impacting event has ended, Hollingsworth added. “It’s important to continue to document after the impact is over,” he said.
However, determining the end of any COVID-19-related event may not be easy. “Just because restrictions are lifted, and workers are able to get back to the site and get back to work, that doesn’t necessarily mean that the impact is over,” he said. “Distancing or other safety measures remain in place, and there could possibly be further delays on the project due to an inability to achieve production rates that existed before COVID-19.”
“It remains to be seen really what the ‘new normal’ is, or when this impact will officially be ‘over,’” he added.
Vanderhider reviewed contract clauses to which construction stakeholders should pay particular attention. “The pandemic highlights—both in terms of drafting new contracts and in reviewing current contracts—the issues of allocation of risk and responsibility. There are a few ways that those themes make their way into contracts. And, they apply to owners, design professionals, contractors, subcontractors, all the way down to suppliers,” he said.
“Key risk allocation and division of responsibility clauses include notice and delay provisions, default provisions, change order provisions, and even indemnity and limitation of liability provisions,” Vanderhider continued “The goal here is to figure out, number one, can I get relief for delays or disruptions or damages due to the pandemic? And then, on the flip side, if I’m the one trying to avoid paying this cost to a contracting or subcontracting party, ‘how do I avoid that?’ And then number two, if there is such a mechanism, how do I assert those rights? Or, how do I defend against them? Those rights typically lie in the contract.”
Force majeure clauses, which are common in construction contracts to excuse non-performance of a contractual obligation under certain extraordinary events, may not protect everyone, Vanderhider said.
“While the application and treatment—and even enforcement—of force majeure clauses varies depending upon what law is being applied, there are a few basic guidelines on this issue. First, the triggering event must be beyond the control or the reasonable control of the party that’s being affected,” he continued. “The triggering event must also affect that party’s ability to perform. And, the affected party also generally should have taken reasonable steps to cure or mitigate that event and its impact before invoking that clause.”
“Some force majeure clauses use terms like ‘disaster’ or ‘governmental order,’ or ‘act of God,’ or similar language. This can result in disputes about whether COVID-19 applies,” Vanderhider added. “We usually see those clauses invoked for earthquakes, floods and fires, [but] maybe not a pandemic.”
Furthermore, Vanderhider advised that cost or schedule impacts of governmental orders may not result in additional compensation in certain situations. “Remember that [force majeure] typically entitles the party seeking relief—if it applies—to time rather than money under many construction contracts.”
Delay provisions also require thorough review to understand both protections and limitations. “Many delay clauses state that a contractor cannot seek more money for a delay or disruption, even if caused by the other contracting party; the claim is limited to an extension of time,” Vanderhider explained. “Be mindful of those sort of provisions in contracts, whether you’re on the requesting side or the defending side.”
Contracts also provide valuable guidance on change orders, Vanderhider said. “Document those issues and why they’re appropriate for a change order. Try to tie them to the contract provision that allows for change orders, use the correct form, if one is required, and be proactive on those fronts.”
“If you’re not sure if your particular impact because of COVID-19 will give rise to a change order, it certainly doesn’t hurt to find out if that can be worked through by agreement,” Vanderhider added.
The same concepts apply to issues of termination or suspension. “Think about not just the termination, but what happens after. Who owes what in the event of termination will depend on the contract terms and the applicable law,” Vanderhider said.
Costs are an important consideration even after suspension or termination, he added. “A suspended or terminated contractor may incur costs for overhead, cancellation fees, materials, equipment rentals, and other issues. Owners even may face costs that they and their lenders didn’t contemplate, and will compensate only what is legitimately reimbursable under the contract. So, the takeaway here is to figure out who’s responsible in the aftermath before you decide to invoke those clauses in your agreement.”
Contracts also provide guidance on how compensation is paid out. “[For example] on a guaranteed maximum price or a fixed-price basis, it may be more difficult to recover,” Vanderhider said. “So be mindful also of how payment is structured in your agreement, because that can impact whether you get relief due to COVID-19 related issues.”
Hollingsworth and Vanderhider also discussed best practices for navigating the resumption of construction and business in the coming months, and the pandemic’s potential impact on the future of the industry.
“First, I’d encourage people to communicate, understanding these are trying times. Unprecedented is a word that’s tossed around quite a bit lately. We haven’t seen a [situation] like this in 100 years, if ever, and it remains to be seen how pervasive and impactful this is,” Hollingsworth said. “So, talk to each other, collaborate, read your contracts, talk with counsel, make sure you’re complying with contract requirements, solicit feedback from team members.”
“Second, I’d encourage people to document. Really take a hard look at project status updates, and be diligent and detailed about documentation,” he added. “Take photos, make sure your project schedule is meticulous, keep detailed notes and logs of impacts to scope, cost and schedule and, lastly, keep with it,” Hollingsworth said.
Dykema is a leading national law firm, serving business entities worldwide on a wide range of complex business issues. Dykema’s lawyers deliver outstanding results, unparalleled service and exceptional value in every engagement.
HKA is one of the world’s leading privately owned, independent providers of consulting, expert and advisory services for the construction, manufacturing, process and technology industries. For more information on how your firm can be best prepared for impacts of COVID-19, email us at inquiries@hka.com.
Webinar summary provided courtesy of HKA technical writer Tricia McCunney-Thomas, inquiries@hka.com.
An additional summary of this webinar can be found at: https://industrytoday.com/maintaining-control-on-construction-projects/
