On January 14, 2021, Skadden and BDO Consulting jointly hosted a webinar in which the effects of COVID-19 on complex construction projects were discussed. The program was based in part on the perspectives of owners and contractors surveyed by Skadden and BDO with direct experience regarding the impact of COVID-19 on their projects. Panelists included Jennifer Permesly, partner in Skadden’s International Litigation and Arbitration Group; Matt Stamp, senior manager at BDO’s construction and environmental solutions practice; and Wiley Wright, head of BDO’s practice for construction and environmental solutions. The discussion was moderated by Bryan Bellack, Managing Director of BDO’s Forensic Investigation and Litigation Practice.
The panel first discussed the various effects of construction projects on the pandemic, including: (i) government-mandated shutdown periods; (ii) new safety requirements and protocols, including PPE, manpower reduction, working time restrictions and access to closed / restricted locations; (iii) interruptions in the supply chain; (iv) delays in approval and other responses from government agencies; (v) work restrictions, labor shortages and travel restrictions that impede workers’ ability to get to work; and (vi) difficulties associated with teleworking in a living construction environment. The effects on construction projects can include delays in the inventory plan, productivity changes, escalating labor and material costs, and higher overheads. The webinar provided examples of how owners and contractors have tried to calculate the impact of these changes on their projects.
The legal ramifications of the pandemic are still unfolding and are unlikely to be resolved for some time. Anecdotes suggest that construction projects seldom invoked force majeure provisions and, where invoked, were limited to the period of mandatory government shutdown and / or the unavailability of direct supplies as a result of the pandemic. The infrequent use of such clauses may be due to the fact that force majeure obligations in construction contracts typically extend the time to complete the project (which the owners do not prefer) and require either party to do so during the force majeure event (which contractors prefer not to bear their own costs).
Comments from surveyed companies indicated that owners and contractors were generally able to arrange time-limited extensions to provide pandemic relief. However, it remains unclear whether these extensions are sufficient in view of the current conditions and whether the parties can agree to further extensions. As disputes arise over the sufficiency of renewals, those tasked with resolving them must address issues such as whether contractors should be required to mitigate the impact on owners or speed up work schedules to make up for lost time. whether there is an obligation to use the “float” contract to offset pandemic effects; and whether the causes of project delays, unlike other construction or supply issues, are related to the pandemic, among other things.
Respondents’ experience also shows that no agreement has yet been reached on who will bear the cost of productivity impacts on construction projects. Clear and reliable documentation, in which productivity effects that may be associated with the pandemic are separated from other, non-pandemic effects, is crucial for determining eligibility. Early planning is also of crucial importance in connection with construction disputes in order to ensure a solid legal balance sheet in the event of a later dispute.
In addition to the ongoing effects of COVID-19 on current construction projects, the pandemic is already affecting future contract negotiations. Owners may be willing to provide a schedule and, occasionally, cost relief for COVID impacts that result directly from a legal requirement in new build and equipment delivery contracts. The questions discussed in the contract negotiations are related to whether such relief extends to COVID-related issues that are not the result of a legal requirement, such as: B. Supply chain issues or labor shortages. The general position of the owners is that we are now far enough into the pandemic that supply chain and labor issues have been less of a problem and contractors should be able to assess their risk. Owners and / or lenders can also ask contractors to be transparent about past effects and planning for future effects. Contractors, on the other hand, urge easing the schedule and, if possible, provisions to take into account other unexpected effects as well. If that doesn’t work, they may try to increase the flat rate or unit cost to reflect the additional uncertainties associated with the pandemic.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is classified as advertising under applicable state laws.