Construction Contracting in the Age of COVID-19

As of this writing, governors of five states have issued “stay at home” orders. How many more states will do the same is anyone's guess. So far, each of these orders is different.  But all prohibit going to work – except for essential services. On that basis, nearly all construction jobs in these states will stop. What should you do? Who pays? At what cost?

This isn’t simple, as I’ll explain.

The obvious issue is project completion dates. Sixteen states (AZ, CA, CT, DC, HI, IN, MA, MD, ME, ND, NV, NY, PA, TN, VA, VT) require a scheduled completion date on residential construction contracts. Any schedule is out the window when a job is shut down by a pandemic. I’m going to assume that courts and license boards in these sixteen states will do the intelligent thing – extend contract completion dates by at least the duration of the shutdown.

Two states take a different approach.

  • West Virginia § 142-5-3.1.2 requires either a completion date or a statement that there is no estimated completion date in home improvement contracts. If the contract has a completion date, West Virginia § 142-5-3.1.12 excuses late completion if delay is beyond control of the contractor. Obvious example: a government-mandated shutdown.
  • New York General Business Law § 771 requires that home construction, improvement and repair contracts state whether time is of the essence. That can be poison, as I explained in January. When time is of the essence, most courts will consider any delay in completion to be a breach of contract. There is no excuse.

No state requires a completion date in commercial construction contracts or subcontracts. But many public works and commercial contracts include a completion date – with charges assessed for delay. These same agreements usually include a force majeure clause to extend the completion date for exceptionally bad weather, war, strikes, lockouts, etc. A good force majeure clause requires an executed change order for any delay beyond control of the contractor. Examples: pandemic or a government shutdown.

Who Pays?

Shutdowns are expensive. Your crews are out of work and may not be available for recall. The site and materials have to be secured. Labor and material costs may be higher when work resumes. Meanwhile, overhead expense goes on as usual:

  • Direct overhead -- temporary utilities, supervision, equipment, some insurance
  • Indirect overhead -- general management, estimating, selling, accounting, bookkeeping, business licenses, taxes, professional and clerical fees.

Is it reasonable that a contractor cover all these costs? Or is government-mandated delay extra work for which extra pay is required? A pandemic isn't the fault of anyone. Common sense requires sharing the burden of government shutdown between owner and contractor.

My advice

If your job is shut down by government order, notify the owner immediately – in writing:

  • Work is suspended. You’ll do what you can to preserve and protect the job site.
  • Suspension by government order is excusable delay for which you are not responsible.
  • Pledge to resume work when the order is lifted.
  • Cite costs that will increase during any protracted delay.

Include with your notice a draft change order for signature by the owner:

  • Amend the completion date. For each day of suspension, the completion date should be moved back 1.3 calendar days.
  • Make it clear that government delay is extra work for which you are entitled to extra compensation.

Protect yourself on all future jobs. Work under contracts that:

  • Require the owner to execute a change order for excusable delay.
  • Make it clear that government-mandated shutdowns are excusable delay.
  • Require reimbursement for both inflated costs and higher overhead expense after an excusable delay.

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