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Top COVID-19 Issues Facing the Construction Industry

By March 23, 2020April 28th, 2020No Comments
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1.         Will I be Held Responsible for Liquidated Damages for Delays Associated with Coronavirus?

Generally speaking, No.  COVID-19 (Coronavirus) is a textbook example of a Force Majeure event.  Meaning an unexpected event that could not have been foreseen by the parties at the time the underlying construction agreement was entered into.  This means that owners will not be able to assess liquidated damages for projects which run over due to the pandemic.  This general rule will apply regardless of whether the project is a local, State or federal project.  While there is more robust legal authority dealing with epidemics as excusing performance on federal projects, the same analysis would apply to State and local projects.

Force Majeure may apply regardless of whether the underlying contract contains a Force Majeure clause.  The first step in the analysis is to review your underlying contract for Force Majeure language.  Proceed in accordance with the terms of any contractual clause.  In the absence of specific contractual language defining Force Majeure, your fall back is the common law definition.

The key to triggering Force Majeure under a construction contract is to provide timely notice of the event to the other contracting party.  Without notice, you may barred from  later asserting this defense.

2.         Can I recover my Cost Overruns Associated with COVID-19?

Depending on the exact language of your applicable contract, Yes.  We are strongly recommending that contractors impacted by COVID-19 track all delay related costs, such as extended general condition impacts, and labor and material escalation impacts to submit as a part of a contractually-required change order protocol.  It is critical that contractors impacted by COVID-19 provide timely notice of said impacts, track all resultant costs, and reserve all rights to pursue a claim on the project to recover those costs.  Strict adherence to the timelines and procedures in the underlying contract is of paramount importance.

It also important for the impacted contractor to mitigate damages.  To the extent feasible, an impacted contractor must establish that it mitigated its damages in incurring those additional costs.  Reasonable steps must be taken to ensure that cost overruns are managed properly in order to recover.  Documented labor rates, material invoices, even time and material tickets, should all be meticulously maintained in order to establish a claim and demonstrate efforts to mitigate damages.

For contracts currently being negotiated (not yet signed) we strongly recommend Force Majeure language to address COVID-19 and any potential lasting impacts that the pandemic may have on future projects.  We have examples of such language available for review.

3.         What Accommodations Must I provide My Employees?  If I Allow my Employees to Work from Home, do I have to Pay them?

Governor Newsom’s March 19th “Shelter in Place Order” applies Statewide and requires individuals to remain in their homes until further notice.  We highly recommend providing flexible employment options for your workers during this difficult period.  Reasonable accommodations for child-care, care for a sick, or elderly family member, or other important responsibilities must be addressed, as should legitimate concerns regarding close working quarters and social distancing.

If you choose to permit working remotely, you must compensate your workers for time spent working from home.  Both the federal government and State of California are working on financial reimbursement packages to offset the costs of employee compensation during this crisis.  We understand that your business operations will most likely be impacted by COVID-19 and thus a loss of revenue is inevitable.  However, you still must pay your employees.

Any remote working options should include firewalls, or other added security protections for your business to ensure the safety of valuable company information. Unfortunately, COVID-19 is leading to an increase in cyber-crime as more employee/employer transactions are occurring remotely.

4.         Has OSHA Implemented any New COVID-19 Restrictions for Construction Work?

Yes.  The California Department of Industrial Relations, Division of Occupational Safety and Health (Cal/OSHA), has implemented a myriad of COVID-19 protections in certain work areas. Specifically, Cal/OSHA’s Aerosol Transmissible Diseases (ATD) standard requires protection for employees working at hospitals, skilled nursing facilities, clinics, medical offices, outpatient medical facilities, home health care, long-term health care facilities, hospices, medical outreach services, medical transport and emergency medical services, correctional facilities, homeless shelters, and drug treatment programs.

To protect workers and prevent exposure to the virus, employers must develop and maintain the required programs and plans for their facility or operation, which includes an educational component.

We are recommending that all contractors implement ATD standards as part of the ongoing safety meeting protocols and further, to develop applicable literature to append to the approved project safety plan.

5.         Will Insurance Cover My Losses Associated with COVID-19?

Probably not.  Most insurance claims related to COVID-19 will be analyzed under a Business Interruption endorsement to your existing insurance policies.  Some businesses have this coverage and some do not.  However, even Business Interruption endorsements have typical exclusions for epidemics and pandemics, and further require some physical damage to your business outside of a basic interruption.

We recommend you check with your insurance broker immediately to ascertain the existence, and breadth of any potential coverage and what exclusions may impair that coverage.

Specific applicability of Business Interruption endorsements to COVID-19 may require further analysis by legal counsel in order to fully protect your rights to coverage and payment.

6.         If I’m in the Construction Business Am I permitted to Work on my Projects?  Can I be Forced to Work on my Projects if I have Legitimate Health Concerns?

Governor Newsom’s March 19th Executive Order mandates that most Californians “Shelter in Place” at their homes until further notice.  The Executive Order specifically exempts certain federal infrastructure arenas deemed vital to the country’s economic safety. These areas include construction related facilities like military bases, utilities, and even construction for housing and shopping centers.  The Governor has since amended his Executive Order to include “critical government services, schools, childcare and construction, including hosing construction” and has specifically identified contractors as a profession exempt from Shelter in Place restrictions. Therefore, if you are in the construction business you are permitted to work on your projects.

We recommend that you check with your project owner for further guidance on whether and when construction will re-commence.

Although construction may be exempted from the State’s “Shelter in Place” Order, it does not necessarily mean that it is advisable to return to work. Each project should be reviewed on a case-by-case basis to ensure the safety and protection of your employees. The welfare of your workers is the most important aspect of your continued operations.  Again, were commend that you evaluate each project individually to ensure that if you do return to work, safety precautions are in place to protect your workers.  That analysis should include a discussion with the project owner and an implementation of the best practices as promulgated by the United States Centers for Disease Control and Prevention, the California Department of Public Health and the Cal/OSHA.

7.         What Resources are Available to my Small Business to Assist me Through the Pandemic?

The United States Small Business Association (SBA) is offering low-interest disaster loans for working capital to certain small businesses suffering substantial economic injury as a result of COVID-19.  The program will offer up to $2 million in assistance per small business to pay fixed debts, payroll, accounts payable and other bills that can’t be paid due to the Pandemic.  The interest rate is fixed at 3.75% for businesses that qualify.  See https://www.sba.gov/funding-programs/disaster-assistance

In addition, Congress is working on financial assistance packages to individuals and families impacted by the COVID-19 Pandemic. The current proposals include immediate cash payments to offset loss in revenues.

COVID-19 is a challenging and dynamic Pandemic never before seen in our current landscape.  Lanak & Hanna is available to answer your specific questions based on the literature and resources available.

The information contained herein is not advice and should not be treated as such. You must not rely on the information as an alternative to legal advice from an appropriately qualified attorney.

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