September 12, 2022
Suggestions for Considering COVID‑19 in Negotiation Strategies for Construction Contracts
This blog post is the seventh in a series of eight that summarize the potential impacts of the COVID-19 pandemic on the construction industry, including the potential applicability of typical contract clauses to the impacts, best practices for mitigation of the impacts, and recommendations for avoiding claims related to COVID-19 in future contracts.
This blog posts summarizes information published in articles and blog posts by various attorneys and law firms, and the intent is to provide a brief summary that may be beneficial to owners and contractors. This post is not written by attorneys and does not constitute legal advice.
Several authors suggest methods for sharing and reducing the risk of COVID-19 impacts on construction contracts. These methods include the addition of COVID-19-specific or other contract clauses, clarification of existing contract clauses such as force majeure and change in law clauses, negotiation of cost-sharing strategies, and the use of bonds and insurance, as discussed below.
In “How to Address the Impact of COVID-19 on Construction Material Pricing,” 11 June 2021, JD Howard and Bruce Smith of Morris, Manning & Martin LLP write that cost-plus contracts shift the risk of building material price increases to owners while fixed price contracts shift risks to the contractors. They write that owners should attempt to tailor their contracting approach to clearly and fairly allocate the risk of increased material prices due to COVID-19 between the owner and the contractor. Howard and Smith suggest several options such as the inclusion of a contingency within the guaranteed maximum price (GMP), limiting the time window for price escalation clauses, setting a threshold price increase for owner vs. contractor liability, or any combination of these.
In “Not Sharing Covid Risks Would Threaten Viability of Construction Projects,” 1 September 2021, Bernard Ang and Isabelle Chan of Pinsent Masons write that if contractors were to price COVID-19 impacts into contract costs, it is likely that either the contractor would price itself out of the project or the owner would wind up paying for contingencies that did not materialize. Ang and Chan write that not taking a cooperative approach and sharing risks could make the COVID-19 impacts on the construction industry even worse. They state that risk should be allocated fairly and suggest it is more efficient to deal with COVID-19 risks in a single comprehensive contract clause, which overrides other clauses and includes a baseline COVID-19 scenario with compensation based on any shift in the baseline.
In “How to Advise Construction Clients to Maintain Contractual and Commercial Hygiene During COVID-19,” American Bar Association, 17 July 2020, Luke R. Conrad and Molly E. Manson of Hinckley Allen & Snyder suggest that parties may want to consider drafting custom contract amendments or adding a form cost-adjustment clause to document baseline prices and calculation methods for adjustments to material prices to account for increased costs due to COVID-19-related supply chain issues. Conrad and Manson also write that several jurisdictions are legislating retroactive amendments with respect to insurance coverage and COVID-19 impacts. They also suggest the consideration of bond products such as payment bonds and performance bonds, which are typically required for public projects but are used less frequently in the private sector.
In “COVID-19 Impacts on Construction Contracts: Legal Arguments For and Against Performance,” JD Supra, 13 September 2021, Laurie Stanziale of Fox Rothschild LLP suggests terms for mitigating the impact of COVID-19 when drafting contracts. These terms include identifying materials susceptible to price volatility and a market index that can be used to determine price increases that would entitle the contractor to relief, limits on duration for fixed prices, the inclusion of price escalation clauses as well as allowances or contingencies, the use of bonds and/or insurance, and owner entitlement to cost reduction if there are significant price decreases.
In “COVID-19: Impacts and Responses in the Construction Industry,” Baker McKenzie, January 2021, the authors write that many parties are wanting to address COVID-19 impacts upfront in new contracts. The authors state that this approach requires adjustments to standard contract forms, typically in the form of a tailored COVID-19 clause. The authors list suggested issues and provisions that should be considered in future contract negotiations including compensation for COVID-19 mitigation efforts and delays related to COVID-19, a pandemic-specific clause in lieu of a traditional force majeure clause, extra work and change in law clauses, a payment scheme that sets out owner and contractor responsibility for increased costs, and suspension/termination rights of the parties.
In “The Dotted Line: COVID-19 Force Majeure Clauses are Losing Their Punch,” Construction Dive, 25 January 2022, Joe Bousquin cites several attorneys who indicate that owners are not accepting force majeure clauses that include COVID-19 in new construction contracts because COVID-19 is no longer unforeseeable. Bousquin also reports that the U.S. Government Accountability Office (GAO) recently upheld the Army Corps of Engineers’ decision to deem a bid nonresponsive because the bid included an additional broad provision that identified COVID-19 as a force majeure event when “epidemics” and “quarantine restrictions” were already considered in the Federal Acquisition Regulation (FAR). However, Bousquin also writes that attorneys suggest that the recent GAO decision does not mean that contractors should not include force majeure clauses in contracts, but that they need to be more specific than just broadly pointing to COVID-19 as an excuse. Bousquin also cites attorneys who indicate that COVID-19 impacts remain a negotiating point when entering into new contracts, and some owners are being realistic about potential COVID-19-related supply chain issues and are accepting material escalation clauses.
In “Material Cost Escalation, Delays and COVID-19: Managing Risk in Challenging Times,” 20 July 2021, Rachael E. Stack and Carl R. Pebworth of Faegre Drinker suggest that contracting parties address increased material prices due to COVID-19 by recognizing potential price volatility and negotiating a mutually acceptable price escalation clause. They write that negotiations should include identification of materials at significant risk for price volatility and fixed-price suppliers for these materials, definition of volatile pricing to include cost and time triggers (e.g., 5% increase over 30 days), pre-ordering materials, and the use of a contingency line item for raw materials. They write that bilateral flexibility should be considered, where an owner sharing the risk of price increases should also share in the benefit if prices drop unexpectedly.
In “Construction Contracts Impacted Now and into Post-COVID World,” by John Bleasby, Daily Commercial News, Canada, 29 October 2021, Sahil Shoor, an attorney cited in the article, recommends the inclusion of a pandemic-specific clause to deal with compensation related to COVID-19 impacts. Shoor suggests that neither party has to bear the entire responsibility for the added costs associated with COVID-19 impacts, but it could be agreed that the contractor would cover costs beyond a certain threshold or that the owner would cover a certain percentage of costs above the GMP. Shoor also suggests that contractual terms specifying consequences for suspension of work could be included to reduce the impact of suspension provisions.
In “Changing Construction Risk Regimes in Light of COVID-19,” 6 April 2020, David Strickland and Michael Yates of White & Case suggest that contract negotiations should clarify the definitions of “pandemic,” “epidemic,” and exclusions in force majeure clauses and clarify the definition of “applicable law” in changes in law clauses to avoid disputes. For example, Strickland et al. write that in some cases, the language in a change in law clause may lead to dispute where an owner may interpret “applicable law” to limit relief to cases involving changes in statutes and regulations while a contractor may interpret “applicable law” to more broadly include governmental decrees such as COVID-related public health orders.
Additionally, in “COVID-19: Managing Force Majeure Risk in a Construction Project Supply Chain,” 13 April 2020, David Robertson, Dr. Matthew Secomb, and Emily Elliott of White & Case discuss the importance of ensuring that risks are addressed on a back-to-back basis when passing risk down a supply chain. Robertson et al. write that problems arise when there are asymmetries in the supply chain with respect to laws governing or the contractual treatment of force majeure delays, which could leave a party exposed to liability for delay while other parties are excused from such liability. The importance of back-to-back synergy of force majeure contract clauses up and down a supply chain are also discussed in “COVID-19: The Current Impact on Construction and Engineering Projects,” by Julian Bailey, Nicolas Bouchardie, and Ignacio Madalena of White & Case, 14 April 2020 and “COVID‑19’s Impact on Construction Contracts – Will Force Majeure Relief or Other Rights be Available?,” by Emma Schaafsma and Michelle Li of Herbert Smith Freehills, 11 February 2020.
Finally, several authors discuss the use of insurance and/or bonds for mitigating risks on construction projects due to COVID-19. In “Dealing with the Construction Impacts of COVID‑19,” by Michael A. Stover, Cynthia E. Rodgers-Waire, and Thomas J. Moran of Wright, Constable & Skeen, American Bar Association FSLC Committee Newsletter, Spring 2020; “How to Advise Construction Clients to Maintain Contractual and Commercial Hygiene During COVID-19,” by Luke R. Conrad and Molly E. Manson of Hinckley Allen & Snyder, American Bar Association, 17 July 2020; “Construction Contracting and COVID-19: Negotiating in Uncertain Times,” by Karen A. Denys and Rachael E. Stack of Faegre Drinker, 10 August 2021; and “6 Ways the Coronavirus Outbreak Will Affect Construction,” by Jennifer Goodman, Construction Dive, 13 March 2020; the authors discuss the potential use of business interruption insurance, payment bonds, and performance bonds with regards to mitigating COVID‑19 impacts.
As detailed above, several authors discuss methods for sharing and reducing the risk of COVID‑19 impacts on construction contracts. These methods include the addition of COVID-19 or other contract clauses, clarification of existing contract clauses such as force majeure and change in law clauses, negotiation of cost-sharing strategies, and the use of bonds and insurance.
Applicability of Suspension and Termination Contract Clauses for COVID‑19 Impacts in the Construction Industry
This is the sixth post in an eight-part series that summarizes potential impacts of the COVID‑19 pandemic on the construction industry.
Applicability of Force Majeure and Delay Contract Clauses for COVID-19 Impacts in the Construction Industry
This is the fifth post in an eight-part series that summarizes potential impacts of the COVID‑19 pandemic on the construction industry.
Applicability of Change in Law and Cardinal Change Contract Clauses for COVID-19 Impacts in the Construction Industry
This is the fourth post in an eight-part series that summarizes potential impacts of the COVID‑19 pandemic on the construction industry.