The impact of the COVID-19 pandemic on construction projects is being felt by developers, contractors, subcontractors and suppliers up and down the labor and material supply chains. In this age of stay-at-home orders, closure of nonessential businesses and social distancing requirements, players in the construction sector are attempting to navigate through the “new normal.”
While there is a difficult road ahead, we are all in this together. Common sense, mutual respect and open lines of communication will likely be the most useful tools.
Unfortunately, projects will most likely be delayed:
- New Projects. Construction projects in the planning stage will likely see the project life cycle extended as developers and end-users deal with delays in securing financing, obtaining necessary entitlements and performing critical due diligence. Currently, commercial banks are making construction loans, and although there appears to be liquidity in the market, industry insiders are reporting a tightening of available credit. Thus far, the plan to deal with the pandemic has resulted in a patchwork of multi-jurisdictional responses. New information, political forces and economic considerations have resulted in an ever-changing and unpredictable minefield for owners trying to get zoning approvals for new projects. Mandatory stay-at-home orders mean that building and planning department offices are either temporarily closed or working with skeleton crews. City councils and planning commissions are postponing hearings on proposed variance and special use requests. The resulting delays are further exacerbated by government-mandated closures of nonessential businesses that make property inspections, surveys, appraisals, soil tests and traffic studies difficult to schedule.
- Existing Projects. Construction projects that were underway when the coronavirus first surfaced are beginning to experience the first wave of delays. Although many construction contracts do not contain a specific reference to “force majeure,” nearly all contain a clause addressing the owner’s and contractor’s rights and obligations in the event the project is delayed due to unforeseen circumstances beyond either party’s control. Such delays resulting from COVID-19 may take the form of extended delivery times for materials and equipment, shutdown of construction activities by governmental entities with jurisdiction over the project, and labor disruptions. The language of the specific contract and the intent of the parties at the time of entering into the agreement will heavily influence whether courts will adjudicate that the impact of COVID-19 resulted in an excusable delay – but experts generally agree that courts are likely to weigh the equities of both parties in these cases.
Unfortunately, the cost of projects will likely increase:
- New Projects. In construction, time is money, and extending the time that a developer or owner must carry the property during the construction cycle means increased costs of interest (on the acquisition loan and to preferred equity investors) and taxes.
- Existing Projects. For projects-under-construction, delays may not only result in increased carry-costs, but may also result in increased “hard costs” that flow up to the owner under the force majeure and/or excusable delay provisions of the contract. Again, the specific terms of the contract will control. An example of possible damages recoverable by the contractor resulting from excusable delays may include the contractor’s (1) increased costs for general conditions and general requirements, (2) cost of site shut-down and remobilization and (3) acceleration costs to regain slippage in the construction schedule.
Fortunately, proactive management of projects during the crisis will improve the outcome:
- Construction contracts typically require the contractor to provide prompt written notice of any event of excusable delay. While the information required in such notice depends on the contract terms, the contractor is required to document and support its claim, including the alleged delays, additional costs and mitigation steps it is taking to reduce the impact of COVID-19 on the project. Developers and end users should carefully review any such notice and the supporting information in the context of the contract’s language to determine whether the notice was timely and properly served to confirm what obligations (if any) owner must fulfill in response. Regardless of whether a response to contractor’s notice is technically required, owners should acknowledge receipt of the notice, clarify whether the contractor is making an official claim for more time or more money and request any missing information and supporting documentation and reserve all of its rights and remedies.
- Enforcement of Contract Provisions. We are in a time of uncertainty that affects every party of interest in the construction cycle, from owners, developers and end users to contractors, subcontractors, lenders and investors. Each situation is different; the alternatives to formal litigation are limited only by the parties’ creativity and desire to move forward in a way that makes good business sense in this new realty. Be proactive and open to offering and discussing creative solutions with an eye to limiting the overall cost impact to the project and underlying business.
As always, do not hesitate to contact us should you need assistance navigating these unprecedented forces impacting your specific projects and the construction industry as a whole. CGS3 attorneys have a long history of guiding our clients through tough times. Both our Distressed Real Estate practice group and our COVID-19 Legal Task Force – comprised of multidisciplined attorneys with expertise in real estate, finance, litigation, construction, tax, and creditor’s rights – are here to help guide you through this difficult process.
CGS3 Insight Alerts are curated with you in mind. They deliver focused, relevant, and timely information on trending topics to our clients, colleagues, and others in the industry. Please note that they are intended for general informational purposes only, and should not be construed as legal advice for any specific situation. Always remember to contact an attorney to obtain advice with respect to a particular issue or problem