Risky Business: Construction Contracts and Losses Caused by COVID-19

Even before the Coronavirus/COVID-19 pandemic, construction projects involved significant risks for owners, contractors, subcontractors, and suppliers. Untold changes in circumstances related to the prices and availability of labor and materials, hidden conditions, and acts or events within or outside the parties’ control have the potential to turn a lucrative project into one that leads to ruin.  Accordingly, one of the primary functions of construction contracts is to allocate these risks so it is clear who will pay for increased costs if something unexpected happens.

Now that we are in the midst of the pandemic and all of the disruptions that come with it, parties to a construction contract should review the terms of their agreements to determine who assumed the risks.  Here are a few key clauses to look for:

1. Force Majeure.  From the French meaning “superior force,” a force majeure clause is triggered by an event beyond the parties’ control that disrupts performance.  The language of these terms typically limit the types of events that entitle a party to relief and define relief available.  They may also require a party to take certain steps before claiming a force majeure.

2. Escalation Clauses.  Except for a “cost-plus” contract that puts the risk of changing prices on the owner, construction contracts typically put that risk on the contractor, subcontractors, and suppliers.  But even these other types of contracts may include a clause that, upon a qualifying circumstance, will allow for an adjustment to compensation.

3. Delay.  Typically, contracts impose liquidated damages on the responsible party when a project is delayed.  But whether that delay will be excused or, in some cases, whether a contractor may be compensated for a delay depends on the language of the contract and who is at fault for the delay.

4. Termination and Suspension.  Some disruptions may be so severe that a project must  cease for a time or be abandoned altogether.  The contract will specify the circumstances that allow a party to suspend or terminate its performance and how the parties will be compensated, if at all.

5. Waiver.  The losses a party may be exposed to when a project is disrupted may be far reaching.  Owners lose the use of a building and potential profits, contractors and suppliers may have increased costs and lost opportunities.  Often the parties will limit the losses they can recover against the other.

Parties negotiating the details of a construction contract should also consider how they want to structure these risks in light of the ever-changing circumstances we now live with for the duration of the Coronavirus/COVID-19 pandemic.

The Construction Attorneys at Mesch Clark Rothschild are here to assist owners, contractors, sub-contractors, and suppliers with liens, contract disputes, and related issues at every stage from contract negotiation through litigation.  We are also seasoned mediators and arbiters.  Call our office in Tucson at (520) 624-8886.