Jon Maxwell Hollman, CCP CEP
Posted from a largely deserted downtown Boston, MA.i.
One impact of the COVID-19 virus is the slowdown or shutdown of construction projects. What began as concerns over supply-chain impacts is growing to encompass massive project delays.
The mayor of Boston, MA has instituted the shutdown of all construction projects for now, citing a State of (health) Emergency. Contractors will mothball and maintain the sites.ii.
We are already seeing savvy contractors notifying owners by letter, reserving their right to make future claim for Force Majeure impacts of presently unquantifiable schedule and/or cost impact. A majority of public agency and AIA contracts include a Force Majeureiii. iv. (Act of God) clause. Most allow "time-no-monies" for such events – an extension of time to complete, but not recovery of costs.
As a claims analyst and estimator, I started thinking about the likely impacts of shutdown and startup to contract cost, schedule and deliverables.
- What is the potential disposition of recovery?
- What issues will owners and contractors clients be requesting help with in the future?
- What temporary works and deliverable changes will be needed to enable orderly shutdown and startup?
- What aspects of cost and schedule impacts do not fit clear-cut contract provisions, leading to disputes and gray areas requiring negotiation?
Under a majority of contract terms, contractors and subs are not eligible to recover most cost impacts. Few would willingly accept this or be able to afford to do so. Most insurance policies (all-risk, wrap-up) that the author has seen appear to exclude coverage.
Contractors may incur significant costs for:
- Direct costs to mothball sites, make safe and demobilize.
- Direct costs to maintain sites (security, public safety, weather protection, storage and warehousing).
- Direct costs for future remobilization, including assessment of work statuses and development "to-complete" costs and schedules.
- Indirect costs to plan and administer the above.
- Loss of skilled trades; recurrence of "learning curve."
Prudent contractors with an eye on maintaining ongoing cash flow and future work opportunities will need to pick their battles and work diligently to present a clear and informed case regarding the cost and schedule impacts they incur. Digging in and demanding Total Cost coverage is unlikely to meet with success. Despite temporary shutdown, contractors will need to diligently adhere to all contract provisions for timely notice, record keeping, site maintenance, and the like.
Contractors may incur significant time impacts for all of the above, and additionally:
- Delay in startup until in-place and remaining work can be assessed, with a revised work plan developed and submitted for approval.
- Unplanned repairs or rework caused by abandonment of project for a period of time.
- Need for re-sequencing work to enhance constructible re-start, best use of limited trade resources, or repair and rework needs.
- Acceleration of completion requests by owners, who have lost use of or targeted revenue from their facilities.
Agreeing on an equitable extension of the time to complete may be contentious, where owners wish to accelerate and contractors are faced with new unanticipated tasks, conditions, and loss of resources and momentum on the project.
Owners and or Sureties may experience direct and indirect losses due to:
- Loss of use of built-out space or infrastructure.
- Loss or delay in business revenues predicated on use of space or infrastructure.
- Extended administrative costs during the shutdown period and any costs due to extended completion dates.
Having "sunk costs" to date, prudent owners may negotiate equitable settlement of schedule and some costs in order to obtain their project objectives. These cost impacts will not have been in their original budget.
Disputes over cost and schedule recovery will surely arise. There will be impacts that neither party feels is fair to own without sharing risk. Some of the disputed or gray areas may include:
- H&S health and safety unplanned costs, sanitizing, worker monitoring.
- Site damages or vandalism during shutdowns, where uninsurable.
- Rework due to shutdown hiatus.
- Impact of resequencing of future work.
- Repeated mobilizations for out-of-sequence work.
- Escalation of future labor and materials costs (although this may go negative…).
- Delays of work and changes to work driven by losses of labor resource availability.
- Restart of learning curves as new resources are brought on board.
We are faced with a contract situation of unprecedented scale and nature in the U.S.- it is not that common to shut projects down! Challenges, conflicts and defaults will occur where untenable impacts cannot be absorbed. We will see some cases where parties on either side desire to walk away from their contract. While diligent adherence to contract terms is always important, it behooves all parties to approach changes and conflict with a willingness to negotiate and share risk equitably.
It may not suffice to merely document cost and schedule impacts; developing unimpeachable causation and finding justification for compensation is often key to recovery. Where all sides have been impacted by shutdown, resolution may spring from a shared desire to resume business-as-usual with minimum delay.
Owners, contractors and sureties faced with these challenges may benefit from consultation with expert cost, schedule and change order/ claims preparers who can assist with formulating strategies and prepare thorough analyses that accord with contract requirements and support resolution.
Jon Maxwell Hollman, CCP, CEP, is an employed cost and claims consultant, holding professional certifications through AACE International. He may be contacted at email@example.com.
The contents of this article reflect the musings of one individual, and do not constitute legal or contract advice.
i. Portions of this article were originally posted by the author on the Communities member forums of AACE International on 3/17/2020.
ii. See Engineering News Record (ENR) 3/17/2020 article: Boston Becomes First City to Shutter Construction Sites Because of Coronavirus
iii. MA. General Laws Ch. 6C §62: ''Force majeure'', an uncontrollable force or natural disaster not within the power of the operator or the commonwealth
iv. FAR Ch. 52.249§14 Excusable Delays: ...the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are... (5) epidemics, ...