Coronavirus Is Here: What Does That Mean for Your Project and Your Business?

Updated: March 13, 2020
By: Alexander Gorelik, Joshua E. Holt, Brian N. Krulick, Shoshana E. Rothman, A. Michelle West, and Brian S. Wood

The outbreak of COVID-19 (“coronavirus”) has wreaked a considerable human toll of death, physical suffering, fear, and anxiety internationally. Much of the fear and anxiety results from a lack of information or a full understanding about the spread of the disease, protection against infection, and treatment. At Smith, Currie & Hancock, we urge our clients, friends, and colleagues to take seriously, but calmly and prudently, the threat of this disease to protect yourselves, your loved ones, and your businesses. The first step in that process is to inform yourselves with reliable information. Toward that end, we direct your attention to the Centers for Disease Control and Prevention’s Coronavirus Disease 2019 website.

In addition to the human toll, coronavirus has caused substantial disruptions to economies worldwide. In that regard, the adage “a picture is worth a thousand words” is particularly foreboding. Satellite images taken by the U.S. National Aeronautics and Space Administration (NASA) of China at the outset of the coronavirus outbreak and approximately a month later show a dramatic decline in air pollution, signifying and illustrating a sharp decline in industrial activity and transportation caused by the disease.

While the outbreak in the U.S. has not reached the magnitude seen in China (greater than ~81,000 cases), Italy (~12,500 cases), Iran (~9,000 cases), and South Korea (~7,900 cases), the U.S. has for the last month felt the impacts of coronavirus on trade and resultant disruptions to supply chains, as many raw materials used in U.S. manufacturing and manufactured goods consumed in the U.S. originate from China and the other impacted countries. In the last two weeks, the U.S. has begun to suffer more direct impacts from coronavirus, as businesses and public entities across the U.S. have cancelled public and group gatherings of all types and have announced and begun to implement flexible work arrangements to allow more work¹ from home and restrictions on non-essential travel. To date, 30 states, plus the District of Columbia, have declared states of emergency. While the CDC, National Institute of Allergy and Infectious Diseases (NIAID), and other health agencies are unable to predict with precision the likely total number of people that will become infected in the U.S. (some researchers estimate upwards of 100 million will become infected), Anthony Fauci, Director of NIAID, testified to Congress on March 11, 2020 simply that “it’s going to get worse.”

The forecast and the continued economic disruption in the U.S. and its trading partners make it increasingly likely that coronavirus will cause appreciable impacts to construction material supply chains, labor availability, and construction projects in general. To prepare for and address this eventuality, owners, contractors, subcontractors, material suppliers, and other construction project participants should consider possible impacts to their labor forces, material availability and price escalation, and disruptions and delays to work. In order to mitigate these risks, project participants should be mindful of contractual and regulatory obligations, while vigilantly and proactively preserving and exercising their rights. Contracting parties should pay particular attention to regulations and provisions addressing (1) force majeure and other excusable delays; (2) material escalation; and (3) OSHA compliance and other employee health and safety concerns.

Force Majeure and Excusable Delays

Modern construction contracts commonly contain provisions addressing risks of delays resulting from “force majeure” (translated from French as “superior force”) and other events and circumstances beyond the control of the parties to the contract. Examples of these clauses can be found in ConsensusDocs 200 Section 6.3 and Federal Acquisition Regulation Section 52.249-14. ConsensusDocs 200, Section 6.3 states in part:

DELAYS AND EXTENSIONS OF TIME.

(1) If Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of Constructor, Constructor shall be entitled to an equitable extension of the Contract Time. Examples of causes beyond the control of Constructor include, but are not limited to, the following: (a) acts or omissions of Owner, Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by Owner, or arising from decisions of Owner that impact the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by Owner pending dispute resolution or suspension by Owner under §11.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving Constructor; (g) general labor disputes impacting the Project but not specifically related to the Worksite; (h) fire; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. Constructor shall submit any requests for equitable extensions of Contract Time in accordance with ARTICLE 8.

(emphasis added)

Similarly, FAR 52.249-14 states in part:

EXCUSABLE DELAYS (APR 1984)

Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor. Default includes failure to make progress in the work so as to endanger performance.

(emphasis added)

While ConsensusDocs 200, Section 6.3 and FAR 52.249-14 address epidemics, actions the U.S. government and other public entities might take to combat such epidemics and other unavoidable circumstances, the remedies granted in these provisions are only excusable time extensions, not additional compensation for the impacts. ConsensusDocs 200, Section 6.3 excludes epidemics, adverse governmental actions, and unavoidable circumstances from the causes for which the contractor is entitled to an equitable adjustment:

(2) In addition, if Constructor incurs additional costs as a result of a delay that is caused by items (a) through (d) immediately above, Constructor shall be entitled to an equitable adjustment in the Contract Price subject to §6.6.

Similarly, FAR 52.249-14 addresses only a time extension for such impacts:

(c) Upon request of the Contractor, the Contracting Officer shall ascertain the facts and extent of the failure. If the Contracting Officer determines that any failure to perform results from one or more of the causes above, the delivery schedule shall be revised, subject to the rights of the Government under the termination clause of this contract.

A court’s or board of contract appeals’ determination of whether delays caused by the spread of the coronavirus are excusable will depend on the specific facts and circumstances. A court may consider such factors as whether the length of the delay is reasonable; whether alternative pools of labor or sources of material could replace the pandemic-affected ones at a reasonable cost; whether the government shut down a project site or project management and for how long; and whether the government imposed an area-wide quarantine.

Even if a court or board finds that the delay was excusable, the language of the contract determines what, if any, remedies are available. If the contract has no force majeure clause, even a delay beyond the contractor’s or supplier’s control may not be excusable or compensable. The court will have to determine whether the purpose of the contract is entirely frustrated by the outbreak of coronavirus, nullifying it. It must also determine whether the contract affords only a time extension or compensation for damages related to the delay as well as considering what mitigating actions a contractor or supplier took to defray the delay and expense of the event.

Common to all force majeure clauses is the requirement to give written notice of the causes of delay. Generally, these clauses require notice to be given immediately upon the occurrence of the event that could impact performance, irrespective of whether the impact is ultimately incurred. Project participants should be hyper-vigilant about potential disruptions to their work, even erring on the side of providing advance warnings and notices of possible disruptions. To be prudent, contractors, subcontractors, and material suppliers should immediately make inquiries as to the status of pending orders and ability of counter-parties to fulfill upcoming orders.

When giving notice, project participants should (1) explain how the coronavirus qualifies as a force majeure or other excusable event under the contract; (2) provide as much specificity as possible about impacts to performance; (3) include any additional contractually required information to the extent it is known; and (4) provide updates as more information becomes available. For contracts still in negotiations, parties should consider including provisions specifically tailored to possible impacts from coronavirus, including suspension clauses that can be implemented on short notice and equitable adjustments to contract prices to account for disruptions and other impacts to performance.

Material Escalations

Dodge Data & Analytics estimates that building product imports from China account for nearly 30 percent of all U.S. building product imports, making China the largest supplier to the U.S. Accordingly, current and continued disruptions to supply chains portend an almost certain impact to prices of construction products and materials. While contractors in the U.S. have already incurred or been notified of delays to construction materials, the U.S. has not felt the full cost impact of disruptions to the supply chain caused by coronavirus. To protect against or mitigate these impacts, project participants should be fully aware of contract provisions addressing price escalation.

To the extent that force majeure clauses do not provide financial relief for qualifying impacting events, contractors and subcontractors will need to look to escalation clauses in their existing contracts and/or consider including such provisions in future agreements for relief. Common escalation clauses specify the materials subject to escalation and define the events that trigger the clause. Often, the triggering event is a specified percentage increase in a standard price index. Other clauses call for making price adjustments at fixed intervals (quarterly, annually, etc.) or upon certain project milestones.

Given the uniqueness of coronavirus, project participants should consider escalation clauses tailored to the circumstances with provisions flexible enough to account for the fast-changing impacts associated with the spread of the disease. These clauses should establish standards for documenting and proving the cost increases, including the exhaustion of alternative sources of supply.

Labor Laws and OSHA Compliance

Employee health and safety is of paramount importance. Not only is this a moral imperative, it is enshrined into laws and regulations applicable to construction and expressly addressed in contract provisions. The Occupations Safety and Health Act (OSHA Act) established the general duty for all employers to provide employees with a place of employment “free from recognized hazards that are causing or are likely to cause death or serious physical harm.” (General Duty Clause, Section 5(a)(1)). Applying this general standard to construction, the American Institute of Architects’ A201 General Conditions of the Contract for Construction specifies in part:

§ 10.2 SAFETY OF PERSONS AND PROPERTY
§ 10.2.1 The Contractor shall take reasonable precautions for safety of, and shall provide reasonable protection to prevent damage, injury or loss to:

.1 employees on the Work and other persons who may be affected thereby;

Coronavirus presents unique challenges to fulfilling project participants’ duties and obligations with respect to health and safety. To assist employers with those challenges, OSHA has provided guidance and general tips to help prevent exposures to, and/or infection with, coronavirus. This guidance on control and prevention can be found at https://www.osha.gov/SLTC/covid-19/controlprevention.html.

As the modes of transmission of coronavirus are not fully understood at this time, OSHA reminds employers of existing standards and regulations meant to protect workers against the transmission of infectious agents. These include:

Bloodborne Pathogens standard (29 CFR 1910.1030);
Personal Protective Equipment standard (29 CFR 1910.132);
Eye and Face Protection standard (29 CFR 1910.133);
Respiratory Protection standard (29 CFR 1910.134); and
Hand Protection standard (29 CFR 1910.138).

OSHA further directs all employers to refer to the CDC’s Interim Guidance for Business and Employers to Plan and Respond to Coronoavirus Disease 2019, which can be found at https://www.cdc.gov/coronavirus/2019-ncov/specific-groups/guidance-business-response.html.

While the CDC’s interim guidance provides detailed steps for “businesses and employers to plan and respond” to the coronavirus, some high-level recommendations include:

Actively encouraging sick employees to stay home;
Separating sick employees;
Emphasizing staying home when sick, respiratory etiquette and hand hygiene by all employees;
Performing routine environmental cleaning; and
Advising employees before traveling to take certain steps, including checking CDC health notices, seeking healthcare advice, and advising supervisors if employees become sick during travel.

The CDC’s National Institute for Occupations Safety and Health (NIOSH) further addresses the possibility of transmission of infectious diseases via mucous membranes of the eye, whether directly (e.g., droplets generated through coughing) or from touching the eyes with contaminated fingers. NIOSH makes recommendations for eye protection to combat these mechanisms of transmission.

States and their subdivisions may also impose additional requirements. At present, 28 states have OSHA-approved occupational safety and health plans. To be approved, the plans must have standards and enforcement programs at least as effective as OSHA’s, and are permitted to have different and/or more stringent requirements. Thus, we recommend that employers refer to both federal and state regulatory resources on health and safety.

ADDITIONAL RESOURCES: See Brian S. Wood’s PowerPoint presentation “Practical Considerations for Dealing with COVID-19.”

STAY TUNED: Smith Currie will continue to monitor developments with coronavirus and will provide additional guidance on the issues caused by the disease.

The Department of Labor’s Wage and Hour Division recently provided some additional information about the obligations that the Fair Labor Standards Act (FLSA) and Family and Medical Leave Act (FMLA) may impose on employers responding to the coronavirus. You can review that information at the following link: https://www.dol.gov/agencies/whd/pandemic.

¹ Wide-scale telecommuting presents increased cybersecurity concerns. Smith Currie intends to address these concerns in a separate publication.

Alexander Gorelik is an Associate in Washington, DC office of Smith Currie. He can be reached at [email protected] or 202.735.2446.

Joshua E. Holt is an Associate in the Tysons, VA office of Smith Currie. He can be reached at [email protected] or 703.506.1990.

Brian N. Krulick is a Partner in the Washington, DC office of Smith Currie. He can be reached at [email protected] or 202.452.2140.

Shoshana E. Rothman is a Partner in the Tysons, VA office of Smith Currie. She can be reached at [email protected] or 703.506.1990.

A. Michelle West is an Associate in the Tysons, VA office of Smith Currie. She can be reached at [email protected] or 703.506.1990.

Brian S. Wood is a Partner in the Washington, DC office of Smith Currie. He can be reached at [email protected] or 202.735.2451.

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