Future construction contracts are about to undergo radical changes. It’s all because of COVID-19 and the uncertainty that will be created by similar pandemics in the future.
“Owners and contractors should include new language in their construction contracts specifically addressing their rights and responsibilities concerning COVID-19,” says David Blake of Seyfarth Shaw LLP. He describes current attempts to respond to COVID-19 using standard contract language as coaxing square pegs into round holes. “With experienced counsel, the time investment to craft the new language is minimal. That investment should pay dividends for owners and contractors alike.”
In a detailed outline of how this new language would address future contracts, Blake offers four key definitions as a foundation of understanding between parties and their responsibilities: COVID-19, COVID-19 proclamations, COVID-19 condition and unknown COVID-19 condition.
Defining COVID-19 itself is the simplest of the four. Blake suggests, “The 2019 novel coronavirus and the disease it causes are collectively referred to herein as COVID-19.”
COVID-19 proclamations would be orders, directives and guidance concerning COVID-19 issued by public bodies with jurisdiction over the project. Specifically, these proclamations would be defined as those that might increase the contractor’s costs, such as social distancing monitoring, PPE requirements and outright shutdowns.
Matters gets a little trickier with Blake’s two other suggested definitions.
A COVID-19 condition would be something attributable to COVID-19 that Blake summarizes as “other circumstances concerning COVID-19 not caused by the contractor and which are beyond its control.” This would include COVID-19 proclamations as described above and resultant supply-chain disruptions.
An unknown COVID-19 condition adds the important element of time, under an assumption that the COVID-19 event and any subsequent proclamations were unforeseeable by the contractor both after their proposal and pricing were submitted, and before these were finalized under contract.
Blake believes that incorporating these definitions into contracts will be necessary for contractors seeking recovery of costs associated with delays, work suspensions, restarts, mandatory compliance and higher material costs.
Timing will be critical, since success would hang largely on what was known and foreseeable at the time of contract signing. Even work suspensions initiated by owners due to their own concerns over health risks, despite the absence of any officially mandated stop work orders, need to be considered in future contracts.
An alternative to the inclusion of new definitions and clauses in fixed costs contracts might be the cost-plus contract.
“A cost-plus contract — also known as a cost-reimbursement contract — can offer an attractive project format in the current construction environment,” say Janeia Brounson and Carl Pebworth of Faegre Drinker Biddle and Reath LLP.
In their basic form, cost-plus contracts are those when the owner agrees to reimburse the contractor’s actual costs, regardless of amount, and in addition, pay a negotiated fixed fee independent of the amount of those actual costs.
“Cost-plus contracts present several advantages on a construction project,” explain Brounson and Pebworth. “Generally speaking, the contractor can focus on the quality of the project instead of the overall cost. Contractors can be less likely to cut corners or to use less expensive materials because the costs will be reimbursed.”
However, there are disadvantages for both owners and contractors. For owners, final costs cannot always be pre-determined. For contractors, cost-plus contracts usually require justification of all related costs — a burdensome and time consuming process.
“Disputes regarding expenses can also arise where a contractor feels a cost is justified while the owner does not,” say Brounson and Pebworth.
For these reasons, a cost-plus fixed fee agreement with a guaranteed maximum price presents attractive middle ground. With so much pricing risk shifted away from contractors, a negotiated project cost cap limit gives owners some upper price protection.
Either way, the age of COVID-19 will require both owners and contractors to address the issue of unforeseen consequences with new clauses or new contract formats.
John Bleasby is a Coldwater, Ont. based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.