COVID-19: Who Bears the Cost for Construction Delays?

COVID-19: Who Bears the Cost for Construction Delays?

By Anam R. Fazli

COVID-19 continues to impact the construction industry. Contractors and owners are realizing that many projects will be delayed for months- and time is money. The ultimate question is: who is liable for delay costs? The answer is in the written agreement. Provisions addressing the potential relief afforded to a party due to delays and impacts are scattered throughout the contract. It is crucial to analyze how various provisions in the agreement interplay.

Force Majeure

The first step is to analyze the force majeure provision. A well-drafted force majeure provision should state whether a contractor is entitled to additional compensation or not. The contractor may have a viable claim for delay costs if these details are absent. However, do not stop there. The parties must read beyond the force majeure provision.

Other Important Provisions

Delays caused by neither the owner nor the contractor will typically relieve the contractor from liquidated and actual damages. However, whether the delay is compensable will turn on the clause(s) limiting the contractor’s compensation. Some of the clauses to watch out for are: (1) notice; (2) schedules; (3) delays; (4) safety; (5) waiver of consequential damages; (6) limitation of liability; and (7) provisions addressing the responsibility for the adequacy of construction plans and specifications. These clauses reduce or eliminate a higher-tier party’s liability to pay for delays and force a subcontractor to absorb the additional costs.

No Damage for Delay

Another important clause is “no damages for delay,” which is an exculpatory clause that precludes damages for delays. In Texas, these provisions are generally enforceable. Owners may attempt to enforce this clause to prevent payment to contractors. However, the contractor can overcome this provision. In Zachary Const. Corp. v. Port of Houston, the Texas Supreme Court recognized exceptions to this provision:

• (1) damage producing delay was not intended or contemplated by the parties to be within the purview of the provision;
• (2) is not within the specifically enumerated delays to which the clause applies; or
• (3) the damage producing delay has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract.[1] The contractor can circumvent this provision if the circumstances fit one of these exceptions.

Notice

Suppose the contractor is entitled to delay costs, now what? The agreement may still require the contractor to submit a notice prior to claims for delay damages. The contractor will waive an extension of time and damages if the contractor fails to notify within the written period.

Quantifying and Proving the Impact

Entitlement to delay costs is part one of the problem. Part two of the problem is quantifying and proving the impact. Let’s say the contractor dotted their i’s and crossed their t’s in the contract. Still, the burden of proof falls on the contractor to show that costs were reasonably incurred, and efforts were made to mitigate costs during the impact.

Costs that could have been reasonably mitigated may be excluded. How well impacts are documented and supported in the following months will directly tie into a contractor’s ability to recover damages. The question will come down to: was the delay caused by COVID-19 or was the project already in delay? The following checklists will help contractors and owners answer this question:

(A) Contractor:

1. Document the status of the project at the outset of the impact
2. Implement a risk management plan
3. Keep an accurate and detailed account of events and costs incurred during the impact period

(B) Owner:

1. Document the status of the project now in order to avoid COVID-19 being used to excuse prior performance failure
2. Document the delays that were apparent prior to the impact

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Anam R. Fazli

Anam provides legal counsel with respect to construction law and commercial litigation issues. She routinely represents residential and commercial construction clients throughout the litigation and arbitration processes. Anam’s experience covers a variety of disputes involving construction defects, breach of contract claims, payment disputes, liens, negligence, insurance coverage, and personal injury issues.

Anam has successfully represented general contractors, subcontractors, manufacturers, insurance companies, owners, and individuals in litigation matters.