The Coronavirus Is Delaying a Construction Project. What Does Your Contract Say?

There was already a shortage of labor in the construction industry before the arrival of the coronavirus. Now, that shortage will likely become even worse. The cost of materials had been rising before the arrival of the coronavirus. Now, developers can expect more of the same, as well as some difficulty in even getting their hands on these materials as supply chains dry up in Asia. The upshot to these trends? Construction project delays that could put developers in default of their contracts.

Now is the time to re-examine those contracts to see what exactly they have agreed to, says Michael Keester, a shareholder/partner at the national law firm Hall Estill in its Tulsa office.

"Construction projects always have a 'time for completion' component and many contractual provisions may certainly come into play in any construction project which is affected by labor shortages from the coronavirus," he says. "Most construction contracts for large projects, including the typical AIA forms, have provisions making time of essence to the contract and certainly the scheduling of the contractor's work is of utmost importance to most contracts.

As construction projects are impacted by the coronavirus, the lawyers for contractors and owners will be reviewing the contracts of their clients to see what contractual rights and duties exist in light of the conditions caused by the spread of the Coronavirus, he says. One item in particular they will be looking for: are any delays excused by the labor shortage caused by this virus.

"There are many terms that will be relevant to those discussions, including the various contractual terms relating to the contractor's schedules, substantial completion, delays, liquidated damages, and other contractual provisions," Keester says.

"One exemplary provision that is pertinent to this issue is '§8.3 of the General Conditions of the AIA Forms, e.g., A-201-2007.' That provision deals specifically with delays and extensions of time and gives certain excuses to the contractor for delays caused by certain events." This provision allows that certain stated delays of the contractor may be excused and may justify extensions of the contract time by change order. "These include delays caused by 'unusual delay in deliveries, unavoidable casualties or other causes beyond the contractor's control … or … other causes that the Architect determines may justify delay' …." Keester says.

To be sure, there will be disagreements over any conclusions a contractor reaches. "I foresee much argument over provisions like the ones mentioned above and excuses to the contractor for shortages in his labor forces caused by the coronavirus," Keester says.

"There will be discussions between contractors, architects, construction managers and owners regarding the impact of this virus, and the various contractual provisions regarding delays, substantial completion, force majeure events and, potentially, even whether such labor shortages give the owner a good excuse to invoke the 'Termination for Convenience' clause of the contract in order to find and hire a contractor who can provide sufficient labor force to complete the project in a timely manner."

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Erika Morphy has been writing about commercial real estate at GlobeSt.com, Commercial Leasing Law & Strategy's ALM sibling, for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.