Insights | March 19, 2020

The impact of the coronavirus on construction projects

As the coronavirus COVID-19 spreads across the world, construction projects will increasingly experience the impact caused by the pandemic and the related measures that have been imposed by governments and authorities in different countries. Below, we summarize the main aspects that should be considered in relation to construction projects.

Expect disruptions to construction projects during 2020

Due to the coronavirus outbreak and as the construction industry relies on a global chain of suppliers and manufacturers of goods for construction materials, many construction projects have already experienced the impact on the production, supply and transportation of goods and construction materials from and to affected areas. In this respect, imposed quarantines have caused manufacturing and transportation companies to close down, causing a stoppage in production and supply lines as well as to the transportation of construction materials. Increasing disruptions to the supply lines can be expected in the coming months.

For this reason, construction projects are likely to be subject to delays, which will give rise to potential claims by employers for liquidated damages on the one hand, and claims for extension of time and additional compensation by the contractor on the other. In the coming months, contractors might also be compelled to find other suppliers of goods and materials which might cause the contractor to incur additional costs for performing the works under the contract. It is also likely that the performance of the work will be impacted as the work force is affected by quarantines, self-isolation and infection, which might cause additional delays and disruption to the project.

So, what to consider in construction projects due to the impact caused by the coronavirus? Below we have summarized what we consider to be the most important aspects to construction projects during the coronavirus in 2020.

Parties should take steps to safeguard their legal interests

Many construction projects will incur additional costs that were not anticipated when the contract was entered into. Ultimately, these additional costs will have to be borne by one of the contracting parties (i.e. the employer or the contractor) or one of the sub-contractors or suppliers, depending on the allocation of risk in the relevant contracts.

For this reason, it is pivotal that parties that might be liable for delay and/or disruption safeguard their legal interests, prepare for possible claims from the counterparty and take all necessary steps to retain their right to the contractual remedies that are available under the contract.

Force Majeure

There are a number of claims and grounds for relief that might become relevant due to the possible impact of the coronavirus. A key issue in this regard is the concept of force majeure. Therefore, a first step should be to consider whether the construction contract includes a force majeure provision.

Force majeure is an event that is not foreseeable and cannot be controlled by the party that is prevented from performing its contractual obligations due to the force majeure event. In a construction contract, a force majeure clause typically absolves the contractor from liability for any delays that have been caused by an extraordinary event which could not be anticipated nor controlled, e.g. a natural disaster, fire or, depending on the wording of the contract, pandemics.

In a construction project, invoking force majeure might entitle the contractor to an extension of time and can be invoked as a defense against the employer’s claim for liquidated damages. However, whilst there are examples where previous epidemics have been considered to constitute a force majeure event (for example in relation to the SARS outbreak), it cannot be assumed that the coronavirus constitutes force majeure in a particular project. Whether or not a force majeure clause can be invoked will depend on the specific impact that has been caused to the project, as well as the particular wording of the provision.

For this reason, parties to construction contracts should carefully consider (i) the specific  wording of the force majeure clause, (ii) the notification procedure required under the clause and (iii) any possible requirements with respect to documenting the impact of the force majeure event on the performance of the works and the additional costs.

Extension of time claims and other possible remedies

To ensure the smooth progress of any project, it is key that both parties keep each other informed of any obstruction, delay or disruption that the coronavirus might entail. In many cases, this makes it relevant for the contractor to consider filing a claim for extension of time.

Aside from force majeure and claims for extension of time and delay claims, also other provisions in the contract might become relevant due to the impact of the coronavirus. In this regard, the contractor might be entitled to additional compensation under other provisions of the contract. The construction contract might also contain a provision for relief if the government or a local or regional authority exercises statutory powers affecting the execution of the works. It should also be considered whether the contract includes any provision entitling the employer to suspend the works under certain circumstances and whether and on what conditions commercial impracticability entitles the parties to terminate the contract.

The impact must be documented

Regardless of whether force majeure or any other provision is invoked to support a claim or to defend against a claim from the counterparty, it is important to document the impact that the coronavirus has on the project. Such records should set out the impact that the coronavirus has had on the performance of the works (i.e. delayed supplies, quarantine, self-isolation etc.) as well as the specific consequences it has had on the production and efficiency of the work (e.g. idle hours, lower efficiency, specified delays).

It should also be ensured that similar records are produced about the work performed by subcontractors and suppliers. Contracting parties may be held liable for the performance of their third-party contractors but might also be entitled to various contractual remedies due to any delays that have arisen in the work performance of subcontractors or due to delays on part of suppliers. To secure sufficient documentation, the agreements with subcontractors and suppliers should ideally include provisions obligating the subcontractor or supplier to produce similar records.

In this respect, the obligation to mitigate the consequences of possible delays and disruptions due to the coronavirus must also be considered. Therefore, it is important to analyze the contractual provisions and legal principles that apply in this regard. Further, it should be ensured that all necessary steps are taken in terms of monitoring and evaluating the delays and disruptions that are likely to occur in the project as soon as they become foreseeable and recording all steps that will be, and have been taken to mitigate the consequences of such impact.

Future contracts

As a final note, with respect to contracts about to be executed, the point of departure is that any continued impact of the coronavirus will not constitute a force majeure event. This is due to the fact that the event was foreseeable at the time of entering into the contract. However, should the coronavirus and its effects change drastically from the current situation and information available to the public, it could potentially re-open the issue of force majeure even for new contracts. Therefore, the contracting parties should carefully consider how the impact of the coronavirus is dealt with in the contract. To avoid misunderstandings and future disputes, it might be helpful to ensure that a provision is included in the contract which specifies the coronavirus as an event which is likely to delay the progress of the project and which regulates the specific circumstances and procedures entitling any of the parties to additional compensation.

Closing remarks

Whilst it is important to safeguard your legal interests in a particular construction project, it is equally important to navigate the commercial reality and the complexity of the global crisis that the coronavirus presents to all commercial actors. Hence, many decisions must not be based solely on contractual provisions. Finally, we advise you to consult your attorney for advice relating to the impact of the coronavirus on construction projects.