The coronavirus pandemic has wreaked havoc on the construction industry.
It has greatly reduced productivity, caused material prices to skyrocket, and slowed the supply chain. This has impacted nearly all contractors – builders and suppliers – who are forced to allocate or absorb the increased costs.1 They also face performance deadlines that are rendered unrealistic and, in some cases, impossible to meet.
Until the pandemic’s effects are greatly alleviated, supply chains will likely remain ambivalent and unpredictable.
Saul C. Glazer, U.W. 1990, is partner and co-chair of
Axley Law Firm’s Construction Law Team in Madison, where he represents owners, contractors, subcontractors, engineers, and architects.
This article highlights what owners, contractors, and suppliers can do to address the pandemic’s impact on supply chains. These steps include diligently identifying possible supply chain issues, and drafting or modifying contracts to allocate the risk and expense of pandemic-caused supply chain delays (via, for example, consequential damages waivers, liquidated damages provisions, and force majeure clauses).
An 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. For example, homebuilders have required new homebuyers to order dishwashers before breaking ground because of the long delays in the supply chain.
As early as possible, owners should work with designers, engineers, and contractors to identify items that may be subject to supply chain problems, and place these orders.
Steel subcontractors should also order steel as early as possible, and consider placing multiple orders if it is not possible to order all the steel at once when not all shop drawings have been approved. Early orders may also alleviate some risk in material cost escalation.
Liquidated Damages
Both the AIA A201 section 15.1.7 and ConsensusDocs 200 section 6.6 waive consequential damages against contractors. With these provisions in place, contractors generally are not liable for consequential damages sustained by owners as a result of late completion due to supply chain issues delaying a project.
Owners, however, still incorporate protections for themselves through liquidated damages, which typically assess a negotiated amount of damages against a contractor for each day a project is delivered past the substantial completion date.
In Wisconsin, liquidated damages are generally permissible so long as they are not a penalty and are a reasonable approximation of the type of losses that might occur because of late completion.2 Owners should document the basis for the amount of liquidated damages prior to contracting, to refute the contractor’s later argument that it is unreasonable or a penalty.
If consequential damages are not waived by an owner in the contract, the contractor should consider 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.Contractors and subcontractors should always carefully review claims and notice procedures before entering into a contract, to ensure they are reasonable and to understand what is required in order to comply with them.
Force Majeure
Contractors may find protection through a force majeure clause. Both section 8.3.1 of the AIA A201-2017 and section 6.3.1 of ConsensusDocs 200 contain such clauses.
The AIA standard language does not reference epidemics or pandemics, but does allow for a contract extension for “other causes beyond the Contractor’s control.” It also does not expressly allow for or exclude an equitable adjustment for the contract sum because of a force majeure.
The ConsensusDocs standard language allows for an equitable extension of the contract time and price if the delay is beyond the control of the contractor and due to an epidemic.
Some argue that, if at the time of contracting there is an existing force majeure, then the parties assume the risk of the existing force majeure. To avoid this argument, contractors should modify the force majeure clause to specifically include COVID-19 as a force majeure.
Contractors should also expressly indicate that “out of the control of the contractor” includes when a subcontractor or supplier has supply chain or labor issues.
Additionally, contractors should demand language similar to that of Consensus Doc 200.1, Amendment 1 Potentially Time and Price-Impacted Materials. This amendment addresses supply chain issue problems, 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 form subcontracts contain properly drafted flow down provisions, which allow contractors to impose uncompensated loss or inexcusable delay on the appropriate subcontractor or material supplier.
Contractors should make sure that their form subcontracts exclude subcontractor or material supplier proposals that contain liability limitations for delays or other clauses that 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 their subcontract obligations. Many subcontracts contain no-damage-for-delay clauses, which are enforceable in Wisconsin.4 Supply chain issues may delay subcontractor performance, 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 depends on the subcontract language.Subcontractors should carefully review indemnity clauses as they may impose liability on subcontractors for delay claims from the contractor or other subcontractors. Subcontractors generally may not recover directly from another subcontractor for delays.5
Conclusion: No Easy Answers
Unfortunately, the pandemic has dragged on much longer than 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 as to allocating supply chain risk.
Parties should invest additional time pre-contract to identify potential supply chain risks, decide how to handle these problems,and negotiate who will bear the cost and time if there are untimely material deliveries.
Endnotes
1 Lydia O’Neal, “Builders Hunt for Alternatives to Materials in Short Supply,”
Wall Street Journal, Oct. 6, 2021 (More than 90% of builders reported shortages of appliances, framing lumber ... according to a May survey by the [NAHB]. Another 90% said they faced shortages of plywood, and 87% cited shortages of windows and doors”).
2Wassenaar v. Panos, 111 Wis. 2d 518, 525, 529-30, 331 N.W.2d 357 (1983) (liquidated damages clauses are generally enforceable in Wisconsin if 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 Material Price Increases: Options for Contractual Risk Shifting,”
State Bar of Wisconsin Construction & Public Contract Law Section Blog, July 27, 2021.
4See 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 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 “Court of Appeals: Subcontractors Cannot Sue Each Other for Negligence,”
State Bar of Wisconsin Construction & Public Contract Law Section Blog, June 10, 2020.
This article was originally published on the State Bar of Wisconsin’s
Construction and Public Contract Law Section Blog. Visit the State Bar
sections or the
Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
