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News

Controlling Costs Under Existing Construction Contracts

Dec 13, 2021

 

The COVID-19 pandemic has been particularly difficult for construction contractors.

Contractors who bid for work in 2019 and 2020 may still be performing work
under pre-pandemic contracts that never anticipated the steep increases in
material prices, labor shortages, and ever-changing regulatory and safety
landscape.

While new construction contracts can be drafted to account for this “new normal,”
contractors may need help now assessing how they can survive their existing
contracts. The first step to understanding your options is to review and
understand all current contracts, with a specific focus on contractual
provisions addressing: material price increases and unforeseen circumstances,
such as any force majeure and change in law provisions.

Old Contracts and the “New Normal”

Contracts that pre-date the COVID-19 pandemic are problematic for contractors because, too often, they were drafted in a way that left contractors exposed to bear the risks that are most prevalent in the “new normal.”

First, a contractor is frequently on the hook for any increase in the price of construction goods, at least in fixed-price contracts and guaranteed-maximum-price (“GMP”) contracts. Second, increased labor costs and labor shortages are frequently borne by contractors in terms of failing to meet construction deadlines that may adversely impact the construction schedule and/or other contractors. A general contractor that is on the hook to an owner for construction delays will frequently have the contractual ability to float down the costs to any tardy subcontractor. Third, increased regulatory enforcement, including vaccine mandates from government
entities and owners, increase the costs to contractors both in terms of reducing the supply of labor and decreasing the productive time of existing workers on site. The same is true for increased illness, quarantines, COVID-19 testing, and worksite shutdowns as a result of COVID-19. Again, too often, pre-pandemic contracts did not anticipate these expenses, but were drafted in such a way to allow owners and general contractors to float these costs to subcontractors.

Contractual Provisions that May Help

As noted above, even in pre-pandemic construction contracts, there may be provisions that can help a contractor lessen the impact of the increases above. Every construction contract is different, so it is critical to understand the exact language and how it interacts with other provisions of your contract. Nevertheless,
the following provisions may provide you some relief.

Material Price Escalation Clause

Although uncommon in fixed-price contracts and GMP contracts, some contracts do contain a clause allowing for price escalation that is caused by a particular condition that is typically specified in the contract. Some contracts, for example, allow for escalation only if the increased cost of materials exceeds a certain percentage of the total contract price. Other provisions may be tied to other benchmarks. In the absence of such a provision, however, the party procuring materials that are a component of its fixed price generally bears the risk of a price escalation on those same materials. If you are lucky enough to have such a provision, it is critical to follow any process outlined in the contract for requesting an adjustment. What’s more, it is advisable to be transparent with the owner or general contractor about the price increase, how you have attempted to mitigate it and have good documentation justifying the increase.

Force Majeure

Many construction contracts contain a “force majeure” provision which operates to excuse performance obligations or to extend time of performance on a contract when an unforeseeable event, or one that is “beyond the contractor’s control,” causes a project delay. While there is little doubt that the COVID-19 pandemic is an event “beyond the contractor’s control,” the party that bears the risk of loss for any resulting
delay or nonperformance will be dictated by the specific language used in the controlling agreement. Therefore, whether the COVID-19 outbreak will be considered a force majeure will depend upon the contractual language previously agreed to by both parties.

Change In Law


Some contracts also my include a change-in-law provision that protects contractors from some or all consequences of change in law. Depending on the language, the provision may shield a contractor against costs and delays that are the result of new laws or regulations, such as the costs and labor shortages that may
result from the OSHA Emergency Temporary Standard relating to COVID-19 Vaccination and Testing, 86 Fed. Reg. 61,402 (Nov. 5, 2021) (“OSHA ETS Rule”).

Specifically, the OSHA ETS Rule requires that covered contractors (i.e., those with 100+ employees) to implement COVID-19 policies, which includes for mandatory vaccination or, in lieu of vaccination, weekly testing for COVID-19. Other laws and regulations requiring quarantines or the shutting down of worksites may
have costs that are potentially covered by these provisions.

Bottom Line

In the end, contractors stuck with pre-pandemic contracts should review them carefully in light of the “new normal” to see if there are any grounds for relief. It is important to follow any contractual requirement carefully in order to take advantage of any provision providing for cost relief or delay in performance. Contractors
are also well advised to be transparent with their general contractors or owners when seeking such offset to avoid the potential for disputes and to ensure a long-lasting, productive, and (hopefully) lucrative relationship.

Source: https://finishingcontractors.org/2021/12/09/controlling-costs-under-existing-construction-contracts/


 

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