Managing Risk Through Contract Contingency Planning

Over the past few months, Atlanta construction contractors have been dealing with the business challenges arising from COVID-19. Managing unexpected and sudden jobsite closures, changing safety guidelines, and ongoing labor shortages have put contractors in a precarious position. Many have had to revisit contracts for those jobs which have been delayed/canceled to assess exposure. Unfortunately, it has become clear there is significant ambiguity on how unexpected risks, such as a global pandemic, should be addressed. The good news is construction contractors can use this as a catalyst to reevaluate contracts to determine how they can offer additional protection from unexpected risks. An important lesson many have learned is there needs to be more attention given to comprehensive contingency planning, even when it seems unthinkable such events could occur. To help clients, prospects, and others, Wilson Lewis has provided a summary of key contract contingency planning considerations below.  

Force Majeure Clauses

In the contract itself, the first place to start is to review the force majeure clause. More thought needs to be given to the definition itself, and how force majeure is defined is up to the parties involved. For example, it may generally exclude COVID-19 as it is now a known and foreseeable event; however, the parties may agree that force majeure is a triggering event for unforeseeable issues with the supply chain and labor force. Going forward, force majeure needs to address issues such as infectious diseases, pandemics, and epidemics. It is expected there will be more limited protection going forward, so specificity is important.

Construction Supply Chain Management

Supply chain disruptions have occurred at all levels since COVID-19 has affected countries around the world. The global supply chain is expected to be disrupted for at least another three or four months, especially for building products imported from abroad. The new reality is that better supply chain management is needed to thrive during the recovery.

Future contracts will need to address who bears the burden of responsibility for supply chain disruptions. Contracts should clearly identify what party owns the risk of delayed or non-deliverable materials and goods. One solution is to require at least two sources for the same product, or specifying options for locally sourced materials so that a backup plan is already in place. Another option is to allocate shared risk with contract alliances or other alternative procurement methods.

Time and Price Negotiations

In the future, it will also be important to determine whether contractors are entitled to adjust project timing and pricing when impacted by COVID-19 or another similar event. If the contractor can prove a significant and measurable impact, there can be conditions that permit extra time or money without the need for legal interpretation.

Moving forward, it may be helpful to define conditions that give rise to time and price negotiations related to a specific COVID-19/pandemic issue, rather than a pandemic as a whole. It will also be important to clearly define time and cost. For example, specifications about when work should start when substantial completion is met and the timeframe to finish the project. Contractors are likely to incur extra expenses for PPE to comply with government mandates and/or owner health and safety guidelines. Future contracts will need to spell out if and how much the contractor is reimbursed for these expenses, as well as, escalated costs due to unforeseen supply chain disruptions.

Labor Agreements

Another lesson learned from COVID-19 concerns the labor force. When governments issue stay-at-home orders and school/daycare closures, even otherwise healthy employees are impacted. Often times, exposure to COVID-19 means a 14-day quarantine. Even if a project is deemed essential, contractors can run into issues when employees cannot come to work. A reduced workforce – and the need for social distancing on-site – can easily result in delays. Future contracts should include options for overtime, second, and third shifts if budget allows.

Cost-Plus Contracts

Although cost-plus contracts are not new, this form of reimbursement contract can provide some level of certainty in a volatile economic climate. Essentially, contractors are guaranteed reimbursement for all direct and indirect project costs, plus an extra amount based on the contractor’s overhead and profit. In this type of arrangement, contractors are free to focus on project quality and job performance, not overall cost. Risk is allocated more to the owner, as final costs can be difficult to determine. A middle ground may be explicitly specifying cost limits and project caps. There are other types of cost-plus contracts, including fixed fee, fixed percentage, fixed fee bonus, and fixed fee with shared cost savings.

Contact Us

The COVID-19 pandemic has forced many construction contractors to carefully review contracts and identify areas where additional risk management protections can be added. Although the pandemic was impossible to predict, now that it has arrived it is important to ensure steps are taken to protect against similar issues in the future. If you have questions about the information outlined above or need assistance with a cash flow planning or other concern, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.