Written by Brian Reid, Jason Roth and Geoff Stenger
The COVID-19 pandemic is having a profound impact on construction projects across Canada causing delays, lost productivity, increased costs and lost profits. To mitigate the impact of these risks, it is imperative that parties across the contractual chain implement proactive identification and management steps. Below is a high-level overview of the most common types of claims expected as a result of the pandemic, and practical considerations for mitigating these risks.
Overview of Pandemic Impacts on Construction Projects
Examples of pandemic related contractor claims and issues include:
- Force Majeure: During the early stages of the pandemic, force majeure notices were issued by owners, contractors and suppliers throughout the construction industry. While many of these claims have merit, many were issued carelessly and without sufficient consideration of how the pandemic actually prevented performance of specific contractual obligations. Unfortunately, some also attempted to take advantage of the pandemic by making force majeure claims in an effort to seek relief for pre-pandemic delays or other performance issues. That said, if the pandemic prevented performance of a contractual obligation, contractual force majeure relief may be available to the owner or the contractor.
- Delay Claims: In connection with force majeure claims or other excusable delay claims, there can be supply chain interruptions, personnel absences and other pandemic issues that cause significant delays. For example, the shut down of a U.S.-based facility producing specialized equipment due to the pandemic or the inability of key personnel to travel to Canada due to travel restrictions may cause a critical path delay.
- Productivity Claims: The pandemic is expected to reduce labour productivity—being the amount of labour input required to achieve a specific output. For example, a drywall contractor building a hotel under a lump-sum contract may have assumed, pre-pandemic, that it will take two workers, 8 hours per day to install drywall in each room. However, PPE and social distancing requirements now mean that this same work takes 10 hours per day forcing this contractor to incur additional labour and overtime costs. Further, while hard work may allow this work to be completed on time, this reduced productivity will cause an increase in labour costs while compensation under the contract remains the same (unless a valid change order is approved in accordance with the applicable contract).
- Additional Material Costs: An example of this could be an owner intending to procure certain materials internationally but being forced to procure those same materials from a more expensive domestic source.
- Insolvency Issues: Unfortunately, some owners, contractors and suppliers may not survive the pandemic. While common forms of security including performance bonds and labour & material (L&M) bonds may mitigate some of these risks, an untimely insolvency may have catastrophic cost and schedule impacts for owners and may leave contracting parties with little recourse other than to pursue to a builders' lien claim.
- OH&S/Labour Issues: There have been examples of construction workers expressing safety concerns or refusing to go to work during the pandemic. These issues may cause delay and productivity impacts. In addition, the "prime contractor" has a legal obligation to keep the work site safe for workers.
Practical Tips for Mitigating the Risk of Pandemic Claims
While the impact of pandemic claims will largely depend on the risk allocation under the applicable contract, below are some key considerations that may assist in this regard:
- Clear Lines of Owner/Contractor Communication: Almost all parties on any construction project will have concerns regarding the impact of the pandemic. To help manage claims and address issues when they arise, it is important to have clear and transparent discussions with respect to the impact of the pandemic and the potential contractual ramifications.
- Review and Comply with Notice Requirements: Owners and contractors should carefully review and identify any applicable contractual notice provisions, as a failure to comply may result in a loss of entitlement to an otherwise valid claim. In addition to notice provisions related to change orders, most contracts also contain stringent notice requirements with respect to the start and end of the alleged force majeure period.
- Cost vs. Schedule Relief: While many contracts do not entitle the claimant to claim additional compensation for a valid force majeure claim, others do. If the pandemic is impacting your ability to perform in accordance with the contract, it is important to undertake a comprehensive contractual review to assess whether the issues resulting from the pandemic entitle you to either or both schedule and cost relief.
- Updated Schedule and Mitigation Obligations: It is important that:
- pre-pandemic schedules be updated to reflect the impact of the crisis;
- all steps being taken to mitigate and overcome delays are documented;
- owners ensure they are receiving and reviewing such documentation which will allow them to assess the contractor's performance, costs and potential impacts of the pandemic; and
- contractors keep careful records if they are looking to obtain schedule and/or cost relief.
- Proactive Change/Claim Management: There is a natural tendency on many projects to focus on completion of the work leaving the resolution of claims to the end of the project. This approach often results in larger claims, builders' liens, potential waiver of claims and increased legal fees. While not always practical, it is therefore recommended that owners and contractors deal with pandemic claims (and all claims for that matter) head-on before they are allowed to fester.
- Understand Project Security: Most large construction contracts require some form of project security, with the most common being performance bonds and L&M bonds. Both of which include stringent notice and other technical requirements. A failure to comply with these bonds may result in the loss of an important available remedy.
- Monitor Solvency Issues and Strictly Comply with Lien Legislation: While it is extremely difficult to assess and monitor the financial health of a third party (particularly those privately owned), there are often warning signs that a party may be in financial distress. For example, a sudden change in invoicing practices (e.g., more aggressive), deteriorating performance and loss of key personnel may indicate trouble is brewing. In addition to being aware of these warning signs, strict compliance with applicable builders' lien legislation is the best way for an owner to mitigate its risk in this regard. Registration of a builders' lien may also be the best way for an unpaid contractor or subcontractor to preserve its rights. For example, conducting title searches before payments are made to verify no liens have been registered should be standard practice as sworn "statutory" declarations should not be relied upon. Furthermore, if an owner is concerned about the financial health of one of its contractors, it is critical that it assess the location of goods that may be essential for the timely completion of the remaining work.
- External Claim Support: As noted in our recent article, Claims Committees and Disputes in the Construction Industry, many parties do not have the internal resources required to properly assess, advance or defend the volume and complexity of claims that may be caused by the pandemic. As such, proactive engagement of external advisors including legal counsel and independent claims consultants can provide a party with the critical support needed to obtain the best possible outcome.
While the pandemic will have a profound impact on construction projects across Canada, careful planning, communication, enforcement/understanding of contractual, legislative and other rights and remedies, will allow these risks to be mitigated.