Kristin Thompson, MJLST Staffer
As a result of the COVID-19 pandemic there have been supply chain issues occurring around the world, causing constant price increases and delivery delays for construction materials.[1] While there are numerous factors that will affect exactly where the expenses of those delays fall, this article briefly outlines the major contractual elements that will come into play when determining whether the contractor, subcontractor or owner bears the risk. The first question that should be asked when investigating COVID-19 related supply chain issues is, “what does the contract say?” However, my first area of analysis begins when the answer to that question is “we don’t have one yet.”
The contract is not yet executed
This is the first major element to be addressed: what point of the contractual process the parties are in. To be clear, once the contract and subcontracts are executed the parties must rely on contract remedies and their pricing structures for relief. However, if the contracts have not yet been executed the contractor and subcontractors still have the potential to push the risk onto the owner or devise an equitable way to share those risks. They can build the supply chain-related price increases and project delay costs into their estimates, putting the owner in the position to either accept the increased cost and timeline or forego the project. During this pre-execution process the contractors will largely either be bidding a cost plus guaranteed maximum price model (“GMP”) or a lump sum model.[2] Here the GMP is ideal as the contractor can build the increased costs into the contingency. The lump sum model will call for an upward adjustment to their estimated total costs to account for the increases, chancing that those estimates will be enough. After adjusting their price model, the contractor and subcontractors can then add contractual language specifically saying that they are allowed time extensions for any and all supply chain delays, define their force majeure clause as inclusive of a pandemic or epidemic, and include change in law provisions that cover mandates issued as a result of the COVID-19 pandemic.
The Contract is Executed
In this case, the parties will need to dive into their contract to see who bears the responsibility for extra costs and find out if they are able to extend their timelines without consequence. Issues relating to extra costs will be almost exclusively determined by whether or not a GMP or lump sum price model was used. Absent provisions stating otherwise, a GMP will allocate the extra costs to the owner up to the guaranteed maximum price as those costs come out of the contingency fee, while a lump sum contract will allocate them to the contractor as the costs will come out of the total bid price.[3] In the latter scenario, the contractor can then hold subcontractors to the price of their contract and make them bear their own price increases which would relieve the contractor from some of the extra cost burden. However, the contractor must keep in mind the reality in which a subcontractor would not be able to bear the extra costs and then either go out of business or refuse to perform. Legal action taken will either be futile if the subcontractor is insolvent, or expensive and time-consuming if they refuse to perform.
The parties then must determine whether or not schedule extensions resulting from supply chain issues are proper. This determination will largely be based on the force majeure clause and change in law provision located in the general conditions.
Force Majeure Clause
If the COVID-19 pandemic is found to be included as a force majeure event, the contractor will be allowed a time extension for the extra work relating thereto. Some contracts pre-dating the pandemic already used language relating to a pandemic or epidemic. The most regularly used form contracts, 200AIA.201-017[4] and ConsensusDocs 200[5],include broad force majeure provisions that have been read to include the pandemic.[6] The AIA provides for “other causes beyond contractors control,[7]” and the ConsensusDocs200 for “any cause beyond the control of constructor” and “epidemics.[8]” The specific delays must still be attributed to the pandemic, and proving causation will depend on the amount of proof the suppliers can provide to support that claim. The more challenging situations are those in which the contracts have narrow force majeure clauses or contain catch-all phrases.[9] Interpretation in these cases tend to be dependent on state law and vary widely.[10] If found to not include the pandemic, the contractor will not be guaranteed a time extension for delays and will be held to their original timeline absent other contractual provisions affording them an extension.
Changes in Law Provision
The final factor is whether the contract has a change of law provision. If so, executive orders or other changes of law related to the pandemic may allow for time extensions.[11] For instance, a delay in production because a factory producing specified windows had to cut their work force in half to stay in line with federal social distancing mandates would constitute a change in law allowing the contractor an extension while they wait for the windows. ConsensusDOCS 200 currently provides that “the contract price or contract time shall be equitably adjusted by change order for additional costs resulting from any changes in laws…[12]” thus laying out an avenue for relief for those party to a ConsensusDOCS 200 contract. Conversely, the AIA.201-2017 currently does not provide a change in law provision, taking away this option for the large number of contractors that use this form.
In sum, when viewing supply chain delays and expenses in an attempt to ascertain who bears the risk one should look to where the parties are at in their contractual process, the price model being used, the general conditions involved and the breadth of the force majeure and change in law provisions.
Notes
[1] Continued Increases In Construction Materials Prices Starting To Drive Up Price Of Construction Projects, As Supply-chain & Labor Woes Continue, The Associated General Contractors of America (November 9, 2021).
[2] Richard S. Reizen, Philip P. Piecuch, & Daniel E. Crowley, Practice Note, Construction Pricing Models – Choosing an Appropriate Pricing Arrangement, Gould + Ratner (2018).
[3] Joseph Clancy, How Do Guaranteed Maximum Price (GMP) Contracts Work?, Oracle (May 20, 2021).
[4] AIA Document 201-2017.
[5] ConsensusDOCS 200.
[6] Force Majeure Provisions: COVID-19, Sheet Metal and Air Conditioning Contractors’ National Association (June 3, 2021).
[7] AIA Document 201-2017 § 8.3.1.
[8] ConsensusDOCS 200 § 6.3.1.
[9] Douglas V. Bartman, Force Majeure in Construction and Real Estate Claims, American Bar Association (July 17, 2020).
[10] Id.
[11] Peter Hahn, Enough About Force Majeure! What Other Options Does a Construction Contractor Have for COVID-19 Pandemic Losses?, JDSupra (April 3, 2020).
[12] ConsensusDOCS 200 § 3.21.1