This article was co-authored by Adrian K. Felix and Lindsay Levin.
During the pandemic, unlike most other industries, the construction industry was deemed to be an “essential” service or industry in many states, so, in large part, construction sites were not subject to the same indefinite, mandatory shutdowns experienced in the hospitality, retail, food and beverage, home, or personal services sectors. That is not to say, though, that the construction industry has been immune to the effects of the pandemic.
Earlier this year, an industry review by Turner & Townsend found that 83 percent of the projects surveyed had experienced pauses or temporary site closures due to COVID-19, and 72 percent reported decreased productivity compared with pre-pandemic levels. The same industry review also found that one-third of respondents did not believe their contracts were sufficient to address the various impacts of the pandemic.
Some COVID-19 effects, such as mandatory shutdowns and limited capacity requirements due to city or state emergency orders (and the associated demobilization, remobilization, and acceleration costs), were obvious and generally fell within the scope of most, if not all, contractual force majeure provisions that, based on the construction contract, provided for compensable or non-compensable time extensions. Other effects of the pandemic, though, were not as obvious, and the risk allocation for anytime and cost events related to such impacts were, absent a broad force majeure provision, often undefined in construction agreements.
Those less obvious or hidden impacts include the following, among others:
Mandatory quarantine periods for workers.
Many city and state health guidelines required (and still require) a 10-to l4-day quarantine period for any worker who tested positive for COVID-19 and, in some cases, any worker deemed to have been in “close contact” with someone who tested positive for the novel coronavirus.
§ Implementation of mandatory health measures, such as—
- hiring an emergency medical service (EMS)—type company to administer required worker temperature screening to enter a project site;
- hiring a “COVID-19 Coordinator”;
- mandatory medical testing, reporting, and contract tracing protocols;
- supplying masks or personal protective equipment (PPE);
- installing handwashing stations and a hot water supply;
- installing temporary doors and windows to enclose buildings in the event of a sudden or immediate shutdown; and
- adding more robust cleaning measures.
§ Implementation of social distancing measures, such as—
- limits on the number of workers permitted to fide a hoist or elevator at any one time (e.g., where pre-COVID, maybe 10-12 workers could ride a ta time, only 3-4 could ride at time during the height of the pandemic);
- limits on the number of workers permitted to work in an enclosed space (e.g., a condominium or apartment unit); and
- limits and distance requirements associated with lunch breaks and food trucks.
§ Delays in scheduling necessary inspections due to local government office closures or inspection holds (or both).
§ Lack of sufficient materials and delays in material fabrication due to supply chain delays or disruptions stemming from COVlD-related factory closures and downsizing.
§ Price escalation for materials and equipment resulting in cost increases.
Contractors did not necessarily account for the extreme material and equipment shortages resulting from COVID-19, which caused the cost of materials to drastically increase and led to disputes as to whether the impacts of price escalation and the party responsible for such cost increases fell within the scope of a force majeure provision or should be handled in accordance with a standard price escalation provision in a contract.
§ Increased costs for project financing and insurance.
§ Lost profits and revenues due to extended project durations.
- delays in project schedules resulting in additional carrying costs for project owners, including additional interest accruing under construction loans; and
- extended duration of projects resulting in unallocated assessments of additional insurance premiums, including premiums for project-specific insurance and builders’ risk insurance policies.
- no clear right or ability to recover delay or liquidated damages to compensate for extended project durations; and
- the inability of developers to sell condominium units or lease apartment or commercial spaces within originally expected time frames.
None of the foregoing COVID-19-related events may necessarily be deemed to constitute a material impact on the budget or critical path of any project when viewed in isolation and/or if they only lasted for a short duration. But the same may not be true when those events are viewed collectively or cumulatively over the course of a year or more. As one contractor framed it, COVID-19-related events can result in ‘death by a thousand cuts?
For example, a two-week mandatory quarantine that affected workers who were part of the supervisory staff (such as the head superintendent or project manager) or that required a subcontractor to hold its entire workforce out due to contact tracing could effectively bring a project to a standstill. Similarly, while implementation of mandatory health and social distancing guidelines may result in only 30 minutes to an hour of lost work time each day, that decreased labor productivity aggregated over an extended period could result in a significant time delay and overall increase to the operating costs of a project.
The uncertainty of whether these hidden impacts were deemed reimbursable expenses that would provide for time extensions or additional/extended costs or both (including the additional cost to a contractor for its supervisory and administrative personnel being stationed at a project for a longer duration than had been contemplated in the original project schedule) led to a significant increase in contractual disputes since 2020.
So, even as an “essential” industry project owners, contractors, and subcontractors were still faced with additional hurdles and costs due to project delays, material and labor shortages, and increased health and safety measures, that both directly and indirectly affected all facets of construction over the past year and a half. While construction has always had its inherent risks and potential adverse cost consequences, the COVID-19 pandemic exacerbated them.
*This article was republished with permission from the American Bar Association