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COVID-19 – It’s Impact on Your Costs of Performing

By Larry Cook

COVID-19 can affect both materials and labor in the construction industry because it affects both service and product providers. To finish a project, a construction company must furnish the labor (the service) to assemble component materials into a final structure (the product).

Materials are among the largest costs of a construction project, and their prices vary depending on the economic climate in the locale, around the country and the world. Material shortages or slowed production can also affect lead times—ultimately delaying the project.

Labor is another significant component of project cost. Finding quality labor for the right price is often difficult, and the coronavirus will make this even more difficult. If workers fall ill, a shortage of labor could not only increase labor costs, but could also slow work, affect the critical path, and delay a project.

While there can be an argument made that the outbreak of the coronavirus in China was unforeseeable, the party who bears the risk and the loss for resulting construction delays will be dictated by the controlling written agreement.  The force majeure clause must be examined to determine if the virus outbreak constitutes an excusable delay extending the completion date and excusing the contractor from liability for any applicable liquidated or actual damages.  Any provisions governing the contractor’s ability to seek compensation for excusable delays also come into play.  What does your construction lawyer think? 

The contractor would likely be granted a time extension under the AIA’s standard form A201 General Conditions, which contains an effective force majeure clause. This provision does not provide, however, the contractor with any right to a time extension or compensation for delays relating to disruptions in the supply chain as a result of the virus. Without a time extension, the contractor could also be subject to liquidated damages or the owner’s actual damages.

One strategy for limiting delays from the outbreak may be to try and substitute materials or equipment. Demand for these substituted materials already has already driven up costs. Standard form construction contracts permit substitutions under certain circumstances where there is also a cost savings to the owner. As such, any increased costs for a substituted product are usually the sole responsibility of the contractor.

With these uncertainties, now is the time to create a plan to mitigate potential material shortages, labor shortages, and other issues that will affect the cost of your construction jobs.

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