Coronavirus Effects on the Construction Industry

By Lauren White, RCS Reporter.

Understanding how manufacturing slowdowns will affect the industry, and how contractors can protect themselves.

We have already seen how the coronavirus is affecting the economy.  Grocery store shelves are emptied of sanitizing solutions and canned goods, travelers have their own rows on flights, people aren’t eating out at restaurants, and the U.S. stock market saw its worst day since the crash in 1987.  Due to quarantines and containment efforts, many factories have either limited production or shut down completely, causing a significant slowdown in manufacturing.

China supplies many U.S. builders with necessary goods and materials.  According to Richard Branch, chief economist for Dodge Data and Analytics, “building product imports from China account for nearly 30% of all U.S. building product imports, making China the largest single supplier to the U.S.”  Already, Construction Dive reported increases in the price of copper, aluminum, and casework.  As of now, steel fluctuations aren’t expected to be significant.

Workers in the construction and roofing industry who rely on Chinese-made products could be facing, “...higher costs and price fluctuations, material shortages, logistics breakdowns, order cancellations, and extended delays in product fulfillment and shipping, ultimately leading to slower project completion times and potential legal squabbles with both suppliers and project owners down the road,” according to Cotney Construction Law.

It is recommended that contractors evaluate their supply chain and identify any vulnerabilities, find alternative supply sources, prepare for price increases, and ensure appropriate provisions are in their contracts to protect themselves from delays, interruptions, and higher prices due to the coronavirus.  

Contractors can protect themselves by including a force majeure clause in their contracts.  Cotney Construction Law defines a force majeure clause as, “...a contractual provision that allocates the risk of performance if performance is delayed indefinitely or stopped completely due to circumstances outside of a party’s control which make performance impossible, inadvisable, commercially impractical, or illegal and provide notice to the parties of the types of events that would cause a project to be suspended or that would excuse performance.”

This provision allows parties affected by the force majeure event to extend, temporarily suspend, or terminate the contract.  An event is classified as a force majeure if it is “beyond the control of the contracting parties, it cannot be anticipated, foreseeable, or expected, and the event must be unavoidable,” Cotney Construction Law explains.  Examples of events include hurricanes, earthquakes, wildfires, wars, labor strikes, and scarcity of energy, among others.

In some jurisdictions, the owner and contractor would share the risk if a force majeure clause wasn’t in place.  However, most of the time, the contractor bears the risk of increased costs and project delays due to unexpected and unavoidable events they have no control over, such as the coronavirus.  “Anything that cannot be anticipated while drafting the contract and factors that could impede progress should be negotiated between the parties and addressed via a force majeure clause added into the contract,” Cotney Construction Law discloses.

Companies may already have force majeure clauses in their contracts.  If that is the case, it is a good idea to review the provisions checking for clear and comprehensive protections.  Companies should consider adding terms such as “widespread epidemic,” “pandemic,” and/or “public health emergency,” since courts typically interpret the clause based on what is specifically written in the contract.  

Contractors should also review the terms in case they need to put them into effect for a coronavirus-related issue.  Oftentimes force majeure clauses “...contain requirements that must be met to invoke and rely on the clause such as providing written notice within a certain time frame and mitigating some of the damages caused by non-performance,” according to Cotney Construction Law.

Adding a price acceleration provision to a contract is another way for contractors to protect themselves.  This provision allows roofing contractors to make adjustments to the contract price, reflecting the actual cost of labor and materials.

Cotney Construction Law urges construction companies and contractors to practice caution when bidding on projects that might not begin for several months after the proposal is submitted.  The contractor may face, “...additional exposure for any increases in the costs of labor and materials caused by the negative impacts of the coronavirus on the construction industry following the bid process.”  While the repercussions of the coronavirus on the market are unknown, it is suggested for contractors to be thoughtful and conservative when estimating jobs.

Now is a good time for employers, contractors, and employees to evaluate their contracts, clauses, provisions, and policies to protect themselves.  

Consult an experienced construction attorney like Cotney Construction Law to help review contracts and add necessary provisions and clauses to remain protected during the coronavirus pandemic.

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Disclaimer: The information contained in this article is for general educational information only.  This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Read our next blog to learn about the employer's and employee's rights during a pandemic.

For more information about the coronavirus, visit our RCS Coronavirus Update page.