By: Holly Welles on June 17th, 2020
Contract Challenges Construction Businesses Must Navigate During COVID-19
The COVID-19 pandemic has rocked many industries to their very core. Lockdowns, quarantine, social distancing, and other health-protecting procedures keep the virus from spreading, but they also create numerous challenges for businesses trying to navigate this new normal. What contract issues are construction industries facing, and how can they make their way over this hurdle?
Essential or Nonessential?
One significant roadblock that construction companies face right now is the broad and ever-changing definition of essential, at least as it pertains to the pandemic. In some states, regulators deem construction essential and allow organizations to continue their work while making concessions for procedures like social distancing, mask-wearing, and disinfecting tools and commonly touched surfaces.
Other municipalities have placed stricter guidelines on work, even as workplaces begin cautiously reopening. In states where construction is nonessential, it becomes difficult or even impossible for businesses to meet deadlines, complete projects, and fulfill contracts. In some circles, this situation leads to contract disputes that are harder to resolve due to the viral pandemic.
Impacts on the Supply Chain
Even in states where construction is an essential industry, companies are struggling to keep up with the growing demand, primarily because of the impact the crisis is having on global supply chains. Even if construction companies can operate, the factories and suppliers that keep them running might have closed their doors—in some cases, permanently.
These circumstances have led many business owners to try and break their contracts with suppliers, exiting the agreement to free up funds for other projects or to keep their crew paid. While the pandemic will eventually end, there is currently not enough information to allow companies to predict when that might happen, so everyone is navigating this blindly.
Is COVID-19 a Force Majeure?
Most contracts, regardless of the parties involved, have a force majeure clause—a term that means "superior or irresistible force" in French—that allows one or both parties to exit the agreement in the event of a natural disaster or other act of God. Could the COVID-19 pandemic be a force majeure, allowing companies to exit their contracts without any kind of penalties?
This challenge is one that businesses will have to face on a case-by-case basis, as it will depend largely on the contract's exact wording. If the force majeure clause explicitly indicates that it can apply to pandemics or outbreaks of disease, the case will be fairly cut and dried. Yet what if that specific language isn't present? In that case, it will be up to the courts on how to rule in regard to breaking or exiting contracts.
Dealing With Delays and Cancellations
What can construction companies do to deal with contract conflicts that arise from delays and cancellations directly related to the COVID-19 pandemic?
To start, they can ensure open communication between the company and the client. Many contracts already contain clauses that accommodate delays due to a lack of supplies, poor weather at the jobsite, or anything else. Start by utilizing those clauses as they apply to the situation. They might not specifically relate to managing the aftermath of a viral pandemic, but they can help companies lay the groundwork for how they will respond to this unprecedented event.
According to experts, the pandemic could last up to two years, so companies may be dealing with these restrictions and contract conflicts for some time. Consider incorporating a clause in new contracts directly addressing the threat of a viral outbreak, and how the company will respond.
Exiting a contract should not be the first option on the table unless there are extreme extenuating circumstances. Negotiation will help both clients and businesses solve their problems so that both parties are happy.
Succeeding in a Post-COVID-19 World
Hardly anyone alive today has faced the challenges that construction companies—and every industry—must now navigate. No one could have predicted the near shutdown of the global economy, forcibly closing project sites, disrupting supply chains, and delaying contract completions.
It may be some time before the COVID-19 pandemic is in the past, so it's up to each organization to determine how they're going to manage these contract conflicts moving forward.
Holly Welles is a freelance writer who covers construction and real estate innovations for publishers across the web, including NCCER and Constructible. She also runs her own residential real estate blog, The Estate Update.