By John Sier
While there has been much ink spilled and hands wrung over whether a pandemic satisfies the requirements for a force majeure if the drafters of the original agreement were not sufficiently prescient to include reference to an epidemic, those arguments will play themselves out in the courts and arbitral fora in the coming years. By this time, nearly every contractor, subcontractor, supplier, and bystander has provided some form of notice to an Owner that the worldwide effects of the pandemic are having a time or cost impact on the ability to continue or complete a given project. It is difficult to comprehend the scale and scope of the current dilemma and how every phase of life is impacted regardless of whether you live in a state with a shelter in place order. As the virus spread across the world, each facet of logistics was hampered. From collecting raw materials to manufacturing to assembly to shipping to delivery, travel restrictions and a dwindling healthy labor pool drained resources from an already overcharged supply system.
The major question now facing Owners is where do we go from here?
The first step is examining the actual performance of your underlying project, both in the context of the contract relationships and obligations, but also in the context of the end goal for the project. Owners need to candidly assess whether the project was on schedule and within budget before the pandemic [and we will use that as the generic shorthand for the event]. A pandemic does not forgive failing performance before the event. Put bluntly, a pandemic is not a “get out of jail free” card for a failing or poorly performing contractor or designer. The Owner’s assessment should be as objective as possible, and not forgiving of failures by any party. If the project was behind schedule when the pandemic occurred, it will be further behind schedule. If the project was overbudget at the time of the pandemic, it will be further overbudget. The important determination is the quantity of time or money that was or should have been a discussion topic before the pandemic.
Once that initial assessment is made, the Owner can begin to investigate the likely time and cost impact of the pandemic itself. The Owner may need to consider partial redesign of the project in order to accommodate or address materials and components that will not be available. The Owner may even need to consider replacing members of the design and construction team because of the financial pressures of the pandemic.
The primary action by the Owner at this point in time is assembling the appropriate team to establish a plan for resuming and completing the projects that are underway. Projects that have not been commenced can be reviewed for their continued viability, but once the decision to go forward is made, those projects will also need a recovery team.
Everyone expects an attorney to be on the team, but the team should also include experts in finance and schedule management. While the lawyer can assist in the documentation and identification of risks and responsibilities, there needs to be a substantial effort on investigating and verifying costs to ensure that the Owner is not paying more than is either required or reasonable without shortchanging the contractor and creating even more financial stress. There are several professionals who work in the field of construction auditing who provide invaluable insight and skills in identifying appropriate and necessary costs and reviewing the details of construction billing.
Likewise, schedule experts may be able to work on behalf of the Owner with the contractor to identify areas for improving the time to complete by techniques beyond creative re-sequencing or the use of pull planning. Along with the designer, the recovery team can explore alternatives that leverage technology or accelerated construction methods, such as increased use of modular elements when appropriate or feasible. Even when the contract documents may not “encourage” collaboration, this is the time for the Owner’s recovery team to develop a new relationship with the designer and constructor focused on solution-finding rather than just problem-solving.
While the word “unprecedented” and the phrase “out of an abundance of caution” should be banned for being overused to the point of being meaningless, the fundamental change being wrought by this pandemic must have a meaning. Relying on traditional notions of fault or compensated risk may be appropriate for delays and impacts occurring before the pandemic, but those notions will be largely ineffective now and into the foreseeable future. Owners must consider what they “win” by successfully denying a force majeure. Much of the losses sustained will not be recoverable. The money is likely gone, and time cannot be retrieved.
This is an opportunity to develop a new model and consider how the design and construction process can be improved. Better cooperation will not prevent or avoid the next pandemic, but the industry can find ways to function more effectively in the meantime.
John Sier is the head of the construction and commercial practice group at Kitch Attorneys & Counselors based in Detroit and with offices in Illinois and Ohio. Kitch is also counsel to COAA.