By Timothy E. Heffernan, John E. Sebastian, Brian C. Padove, Frank J. Marsico, Lauren E. Rankins, and Sara M. Bour of Watt, Tieder, Hoffar & Fitzgerald L.L.P.
As the Coronavirus (COVID-19) continues its spread across the globe, it will be imperative for construction industry entities, contractors, subcontractors, suppliers, and sureties to be aware of the probable impacts that will arise because of the global pandemic. With this in mind, Watt Tieder’s Irvine, California office authored an informative general article on March 17, 2020 discussing force majeure claims and the potential impact of the Coronavirus pandemic on contractual performance obligations, which can be found here: Force Majeure: Navigating The Impact Of The Coronavirus Pandemic On Contract Performance Obligations. Following that article, we have focused on COVID-19’s probable impacts on projects with the Government. Federal construction contracts are governed by the Federal Acquisition Regulation (“FAR”) discussed below.
There are certain impacts that will result from the pandemic and will impact labor and material. The government may even mandate construction shutdowns. As such, numerous issues are likely to arise in construction supply chains within the United States and globally. For example, industries including computers and electronics, fabricated metal, and chemical producers have reported that the coronavirus outbreak is impacting their businesses. (U.S. Manufacturing Sector Stalls as Coronavirus Hits Supply Chains - Reuters).
Another likely impact will be a shortage in labor. The Center for Disease Control (CDC) as well as the U.S. Department of Labor Occupational Safety and Health Administration (OSHA) have recommended that (1) employees who are symptomatic should stay home, even if they are not yet diagnosed as having COVID-19, and (2) if the employee has immediate members of their home that are sick, the employees should stay home. As such, it is likely that excessive “absenteeism” of laborers will occur whether such absenteeism is due to the employees/laborers having the illness themselves or the employees’ family member(s) having the disease. See OSHA Guidance on Preparing Workplaces for COVID-19.
Finally, another potential impact will be due to government-mandated construction shutdowns. It is likely that, as COVID-19 continues to spread throughout the country, the Government will suspend construction activities to combat the spread. A good example of that is the City of Boston shut down for all major construction projects. A Government shut down for construction projects that are within a large city is even more likely as additional metropolitan areas begin issuing “shelter-in-place” directives.
These are only a few of the many impacts that are anticipated to occur from COVID-19’s spread across the globe. As such, Watt Tieder wants our federal contractor clients to inform themselves of the relevant provisions of their federal construction contracts.
FEDERAL ACQUISITION REGULATION—COVID-19 AN “EXCUSED” DELAY?
Two sections of the FAR directly address delays related to the COVID-19’s likely impact on federal construction projects—FAR § 52.249-10 and § 52.249-14. As these FAR clauses are widely incorporated into most federal construction contracts, it is important for contractors to appreciate their application to your federal projects.
FAR § 52.249-10 relates to the Government’s right to hold a contractor in default due to, among other things, delay. This default clause provides, in relevant part, that if the Contractor fails to perform in a way that will ensure completion within the time specified in the contract, or if the Contractor fails to complete work within said time, the Government may (by written notice) terminate the Contractor’s right to proceed with work that has been delayed. See FAR § 52.249-10(a). The Government’s default clause continues by providing that the Contractor and its sureties will be liable for damages “resulting from the Contractor’s refusal or failure to complete the work within the specified time . . . [including] any increased costs incurred by the Government in completing the work.” Id. The Government’s right to terminate for default is not absolute, especially in light of a worldwide pandemic.
The “Default” clause provides protections to the Contractor for, among other things, delays “arising from unforeseeable causes beyond the control and without the fault or negligence of the Contractor,” including “epidemics,” “quarantine restrictions,” and a catch-all provision providing excused delayed performance relating to “delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers.” See FAR § 52.249-10(b)(1). It is imperative that if a Contractor is faced with such a delay, the Contractor must, within 10 days from the beginning of any delay, notify the Contracting Officer in writing of the causes of the delay. Id. at (b)(2). After notice, the Contracting Officer is required to investigate the facts and extent of the delay, and if the facts warrant such action, shall extend the time for the Contractor to complete such work. Id. Such findings of the Contracting Officer are final and conclusive, but subject to appeal under the Disputes clause. Id.
Accordingly, pursuant to FAR § 52.249-10, while the Government has a right to default its Contractors for delay, the Contractor’s delay may be excused if the delay is, in fact, related to COVID-19—a global pandemic, a potential government-mandated quarantine restriction, and/or the delay to the Contractor’s subcontractors or suppliers that was unforeseeable and outside of their control. However, even though the Contractor may have an “excused” delay under this regulation, the Contractor must still provide written notice 10 days from the beginning of the delay to the Contracting Officer.
FAR § 52.249-14 “Excusable Delays” sets forth language providing that Contractors shall not be in default because of “any failure to perform [the] contract . . . if the failure arises from causes beyond the control and without the fault or negligence of the Contractor,” including “epidemics,” “quarantine restrictions,” and “acts of the Government in either its sovereign or contractual capacity.” See § FAR 52.249-14(a). Similar to above, the regulation continues by stating that the Contracting Officer “shall ascertain the facts and extent of the failure,” and that “[i]f the Contracting Officer determines that any failure to perform results from one or more of the causes above, the delivery schedule shall be revised . . .” Id. at (c). Accordingly, this clause provides similar rights to Contractors with regard to COVID-19’s potential effect on the timing of completing government construction project work.
COMPLYING WITH FAR
While the Government’s right to default a Contractor for delayed performance is not automatic given FAR §§ 52.249-10 and 52.249-14, the Contractor’s right to “excused” delayed performance is not automatic either. Pursuant to FAR § 52.249-10, the Contractor must provide written notice to the Contracting Officer within 10 days from the beginning of a delay, and only thereafter, will the Contracting Officer investigate the notice and excused delay claim. While it is generally understood that COVID-19 is a global pandemic affecting industries throughout the world, the Contractor nevertheless must still put the Government on notice of any delays caused by COVID-19 in order to trigger the Government’s duty to investigate and render a decision and avoid being declared in default for untimely performance.
The Contractor’s burden of proof with regard to excused delay includes (1) affirmative proof that the delay was caused by or arose out of a situation which was beyond the contractor’s control; (2) affirmative proof that the Contractor was not at fault or negligent; (3) demonstrating that the performance would have been timely but for the occurrence of the event which is claimed to excuse the delay; (4) demonstrating that the Contractor took precautions to avoid foreseeable causes to the delay and mitigate the effects; and (5) establishing a specified period of time that performance was delayed by the causes alleged. See In Matter of Appeal K.C. Printing Co., GPOBCA No. 2-91, 1995 WL 488531 (Feb. 22, 1995); See also In Matter of Appeal of Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995). Contractors cannot simply sit back and rely on the mere existence of the global COVID-19 pandemic in order assert an excused delay. Instead, Contractors should take proactive action to limit any liability relating to COVID-19 delays.
SUSPENSION OF WORK AND COMPENSATION
Non-compensable delays are another salient issue that Contractors should be prepared to face both during and after the COVID-19 pandemic. Though Contractors may be afforded additional time pursuant to the above FAR provisions, where projects are stopped due to COVID-19 or “quarantine restrictions,” these Contractors will not receive additional compensation as a result of the excused delay. Unfortunately, with the ripple effects of COVID-19, Contractors can expect an uphill battle in maintaining workers and subcontractors subsequent to a stoppage of work. Furthermore, Contractors can also expect to feel the impacts when the project restarts, such as decreased availability of labor and increased costs of materials. Consequently, project delays may become even more grave where additional compensation is not approved.
However, a prepared and organized Contractor may hold the keys to alleviating the distress of non-compensable delays. FAR § 52.242-14 provides, in relevant part, that “[t]he Contracting Officer may order the Contractor, in writing, to suspend, delay, or interrupt all or any part of the work . . . for the period of time that the Contracting Officer determines appropriate for the convenience of the Government.” See FAR § 52.242-14(a). This regulation also provides for much needed compensable delay relief to Contractors whereby Contractors may make a claim for adjustments when their performance is delayed for an unreasonable period of time including adjustments for, among other things, increases in the cost of performance. Id. at (b). Yet, similar to “excusable delay” clauses, such a right to adjustment of the contract sum is not automatic. A Contractor’s claims are limited and specifically not allowed (1) “for any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved . . .,” and (2) “unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract.” Id. at (c). As such, if the Contracting Officer invokes the suspension clause, Contractors must assert their claims for adjustment soon after the suspension or any postponement of work on the project has been lifted and performance of work is set to restart. Note, however, that while this FAR contemplates equitable adjustments for unreasonable delays in the performance of the contract, Contractors are only entitled to relief under this FAR where the government takes an unreasonable length of time restarting the work on the project or an unreasonable length of time extending the contract completion time, when such a delay is proximately caused by the government’s action, and resulting damages occur. See CEMS, Inc. v. U.S., 59 Fed.Cl. 168, 230 (2003). Thus, to prove successful under this FAR, Contractors must show that the “delay is caused by the government’s action or inaction,” but “to the extent a delay is caused by the fault or negligence of the contractor, no adjustment is warranted.” Id.; See also Sergent Mech. Sys., Inc. v. U.S., 34 Fed.Cl. 505, 526-27 (1995). Nevertheless, each construction project has its own nuanced issues which may give rise to supplemental, ancillary arguments regarding Contractors’ rights to equitable adjustments.
In summary, Contractors are likely to fare better where the government invokes the FAR “suspension of work” clause and Contractors make a claim thereunder, rather than reliance solely on the FAR “excused delay” clauses. On the one hand, the “excused delay” clauses provide Contractors with additional time to complete performance due to the spread of COVID-19 or quarantine restrictions. However, these clauses do not provide for compensable delays, in the form of equitable adjustments, in a time where many Contractors will need additional funds. On the other hand, the FAR “suspension of work” clause, can provide Contractors with much needed monetary relief, so long as the Contractor complies with all notice requirements and required procedures to make a claim for additional monetary compensation. Thus, while Contractors may be able to rely on the “excused delay” clauses for additional time to perform, Contractors should be aware of the process to make a claim under the FAR “suspension of work” clause should Contracting Officers invoke such a clause. Notably, the clause provides Contractors with the ability to make an adjustment claim which may provide Contractors with greater security and confidence that they will be equitably paid even without knowing, with certainty, the impact COVID-19 will have on construction projects.
PRACTICAL CONSIDERATIONS AND TIPS
Nevertheless, if Contractors do want to enforce the “excused delay” provisions of FAR or make a claim for adjustment should the FAR “suspension of work” clause be invoked, Contractors have an affirmative duty to put the Contracting Officer on notice of such a delay or claim as well as mitigate damages relating thereto. Thus, with that in mind, below are some practical tips for federal contractors to consider moving forward through these uncertain times:
(1) Send timely written notice to the Contracting Officer (or Owners in the case of private contracts) that there is a potential for delay due to the global Coronavirus/COVID-19 pandemic as well as existing (and anticipated) quarantine restrictions. Such notice can and should be given proactively due to the high likelihood of COVID-19 affecting construction projects worldwide.
(2) Compile evidence and supporting documentation relating to your efforts to meet construction schedule deadlines as well as evidence demonstrating the correlation of COVID-19 to any corresponding delay (i.e. communications from suppliers, labor forces, etc.) and the steps taken to mitigate damages/losses including efforts taken to comply with the current schedule. In other words, document everything your business does in relation to COVID-19 and the performance of your construction contract.
(3) Be proactive in coordinating with your material suppliers and stay well-informed of news that may affect your supply chain. For example, stay up-to-date on any restrictions being placed on ports and/or manufacturing plant closures.
(4) Prior to entering into any new contracts, consider the potential impacts of COVID-19—namely make sure to protect your company with regard material suppliers. Again, as of now, the potential impact of the pandemic is uncertain, but what is certain is that it will have a large impact on the manufacturing and shipping of goods. As such, a Contractor must carefully consider new contract terms and conditions given the amount of information existing as to the global pandemic. Contractors should take such delays and impacts into account as they enter into new contracts in the foreseeable future.
(5) Know that each construction project has its own nuanced issues and problems and that questions, concerns, and uncertainties will arise. However, you are not alone in this process, and should you have any such questions or concerns you should seek the advice of knowledgeable attorneys with experience in the construction industry.
Again, while these are uncertain times, contractors can be proactive and take measures now to ward off and limit potential liability resulting from delays caused by the Coronavirus/COVID-19 pandemic. In this regard, there are experienced attorneys who are well-suited to help you through these times and who are available to discuss these steps with you and answer any questions you may have regarding your Federal or other construction contracts.
Timothy E. Heffernan is a Senior Partner and member of the Watt, Tieder, Hoffar & Fitzgerald L.L.P. Board of Directors. His practice concentrates on construction, government contracts, compliance, suretyship law and litigation on a national and international level. He can be reached at email@example.com or 703.749.1000.
John E. Sebastian is Senior Partner at Watt, Tieder, Hoffar & Fitzgerald L.L.P. He focuses his practice primarily in the areas of surety bond, construction and commercial litigation. He can be reached at firstname.lastname@example.org or 312.219.6900.
Brian C. Padove is an Associate at Watt, Tieder, Hoffar & Fitzgerald L.L.P. He focuses his practice in the areas of commercial litigation, construction law, and suretyship. He can be reached at email@example.com or 312.219.6900.
Frank J. Marsico is a Partner at Watt, Tieder, Hoffar & Fitzgerald L.L.P. He concentrates his practice in construction and surety and fidelity law, providing a full range of litigation and transactional services to his clients. He can be reached at firstname.lastname@example.org or 312.219.6900.
Lauren E. Rankins is an Associate at Watt, Tieder, Hoffar & Fitzgerald L.L.P. She focuses her practice on commercial, construction and suretyship litigation. She can be reached at email@example.com or 312.219.6900.
Sara M. Bour is an Associate at Watt, Tieder, Hoffar & Fitzgerald L.L.P. Her practice focuses on a range of complex litigation and transactional matters, with her core practice centering on commercial, construction, suretyship and insurance disputes. She can be reached at firstname.lastname@example.org or 312.219.6927.