Covid-19 has created many challenges for owners and contractors. Initially, the biggest fear was that a Covid-19 outbreak might shut down a construction site.[1] Next, material prices skyrocketed. Currently, one of the largest concerns is the unreliable supply chain. This article discusses supply chain delay claims and steps owners, contractors, and material suppliers can do to help mitigate the effects of supply chain troubles.
Ounce of Prevention
Steel deliveries have been a major supply chain issue. However, the supply chain has impacted numerous items including windows, cabinets, and appliances. Home builders have been requiring new home buyers to order dishwashers before any ground has been broken on a new home site, because of the long delays in the supply chain. To the extent possible, owners should work with their designers, engineers, and contractors to identify items that may be subject to supply chain problems as early as possible and order difficult to obtain materials. Steel subcontractors should also order steel as early as possible, and consider ordering steel with multiple orders, when it is not possible to order all the steel at once because not all shop drawings have been approved. Early orders may also alleviate some risk in material price escalation costs.
Liquidated Damages
Both section 15.1.7 of the AIA A201 section 6.6 of ConsensusDocs 200 waive consequential damages against contractors. If these provisions are not struck or modified, contractors generally are not liable for consequential damages to owners for late completion if supply chain issues delay a project. Owners, however, typically protect themselves by imposing liquidated damages for delays which extend the substantial completion date. In Wisconsin, liquidated damages are generally permissible so long as they are not a penalty, and a reasonable approximation of the type of losses that might occur because of late completion.[2] It is important for owners to go through the exercise of documenting the basis for the amount of liquidated damages prior to entering into a construction contract, so there is a documented justification for the amount if a contractor subsequently argues that the amount is unreasonable or a penalty.
Contractors should consider requiring a limit on the amount of consequential damages to avoid a catastrophic loss in the event of late completion. Most construction contracts allow contractors to extend the substantial completion date for excusable delays if they properly follow the contract procedures to extend the contract time. Contractors and subcontractors should always carefully review claims and notice procedures before entering into a contract, and make sure they are reasonable and to understand how to comply with any agreed upon procedures.
Force Majeure
Contractors may find protection from delay clauses through a force majeure clause. Both section 8.3.1 of the AIA A201-2017 and section 6.3.1 of ConsensusDocs 200 contain force majeure clauses. The standard language for the AIA does not reference epidemics or pandemics, but does allow for a contract extension for “other causes beyond the Contractor’s control.” The AIA standard language does not expressly allow for or exclude an equitable adjustment for the contract sum because of a force majeure. The standard language in the Consensus documents allows for an equitable extension of the contract time and price for contractors if the delay is beyond the control of the contractor and due to an epidemic. Some argue that if at the time of when a contract is made there is an existing force majeure, then the parties assume the risk of the existing force majeure. To avoid any dispute, contractors should modify the force majeure clause to specifically include Covid-19 as a force majeure, and also expressly indicate that out of the control of the contractor includes when a subcontractor or material supplier has supply chain or labor issues. In addition, contractors should seriously consider demanding language similar to that of Consensus Doc 200.1, Amendment 1 Potentially Time and Price-Impacted Materials. This amendment addresses the problem of supply chain issues, and allows for price and time increases due to those supply chain items expressly identified at the time the contract is made.[3]
Subcontractor Concerns
Contractors should make sure that their subcontracts contain properly drafted flow down provisions which allow contractors to impose any uncompensated loss or inexcusable delay on the appropriate subcontractor or material supplier. Contractors need to be careful to make sure that subcontracts exclude where possible any subcontractor or material supplier proposals that contain limitations on liability for delays or contain other clauses that may impose liability on the contractor that cannot be passed through to the owner. Where such limitations are industry standard, contractors should attempt to shift risk of delays back to owners.
Subcontractors should be fully aware of what obligations they are undertaking as part of their subcontracts. Many subcontracts contain no damages for delay clauses which are enforceable in Wisconsin.[4] Supply chain issues may cause longer durations for subcontractors even with respect to materials that are the responsibility of another subcontractor. A no damage for delay clause will likely bar the innocent subcontractor from receiving additional compensation. Subcontractors may be required to accelerate work or re-sequence work. Whether such costs are recoverable to the subcontractor will depend on the language of the subcontract. Subcontractors should carefully review indemnity clauses as they may impose liability on subcontractors for delay claims from the contractor or other subcontractors. Subcontractors generally do not have the ability to recover directly from another subcontractor for delays.[5]
Conclusion
Unfortunately, Covid-19 has dragged on much longer than anyone has anticipated. Thankfully, the construction industry has remained strong economically. However, supply chain issues have imposed substantial costs on owners, contractors, subcontractors, and material suppliers. There are no easy answers in terms of how to allocate the risks of supply chain issues. Parties should invest additional time pre-contract to identify as many of the potential supply chain items as possible, and decide how to handle these problems, and who will bear the cost and time if there are untimely deliveries of necessary materials.
[1] An earlier blog post also generally addressed planning for the impacts of Covid-19 on the construction industry. Construction ＆ Public Contract Law Section Blog: Coronavirus in Construction: Plan Now for After the Outbreak: (wisbar.org).
[2] Wassenaar v. Panos, 111 Wis.2d 518, 525, 529-30, 331 N.W.2d 357 (1983) (liquidated damages clauses are generally enforceable in Wisconsin so long as clause is not a penalty, precise damages are difficult to estimate, and the amount is a reasonable approximation of the anticipated harm).
[3] On the issue of dealing with material price escalation, see also Construction ＆ Public Contract Law Section Blog: Construction Material Price Increases: Options for Contractual Risk Shifting: (wisbar.org).
[4] See John E. Gregory & Son, Inc. v. A. Guenther & Sons Co., 147 Wis.2d 298, 304, 432 N.W.2d 584, 586 (1988)(“no damage for delay” clause is generally enforceable, except in such cases of intentional wrongdoing or gross negligence, on the part of the party seeking to be protected).
[5] For a more detailed analysis of why subcontractors generally cannot sue other subcontractors for delays, see Construction ＆ Public Contract Law Section Blog: Court of Appeals: Subcontractors Cannot Sue Each Other for Negligence: (wisbar.org).