Without question, construction projects will be delayed as cities and states across the U.S. implement restrictions to prevent the spread of the COVID-19 virus. The construction sector generally gets a greenlight to operate as usual because it is broadly considered to be an essential service, but output may be affected as contractors do what they can to minimize the COVID-19 virus risk among their workforce. Cities like Boston have also specifically asked that construction projects stop to contain the potential spread of the COVID-19 virus.
In preparation for continued delays, companies with active construction projects should evaluate important tasks to begin now, in order to minimize cost and further time implications down the road.
Dig Into Insurance Policies
One of the first questions to answer is, “Does the project owner or contractor have business interruption insurance for the construction project?” In certain circumstances, project owners or contractors may be able to file business interruption insurance claims for losses from shutdowns due to the COVID-19 virus.
The key will be whether the project owner or contractor had purchased the business interruption insurance prior to the project’s delay. It will also be important to review whether business interruption insurance excludes losses due to viruses. While this is not a common exclusion, it is a possibility. There also has to be a coverage trigger within the policy. For example, a trigger could be the mayor has ordered restaurants closed, or an employee has tested positive and the business has to go into quarantine. While meeting these triggers does not ensure coverage, it is an option for many policyholders.
Review Your Contract Agreements
Reviewing contract language will be one of the most vital areas of preparation for project owners and construction entities alike. Each of these elements will lay out the process that will ensue from delays for materials, labor, and project completion. Key sections and language to look for in a contract include:
- Force majeure – Look for this language in the contract that removes liability for the contractor if natural or unavoidable disasters interrupt or delay plans.
- Delays and extensions of time – This section of the contract outlines the formal communication and record-keeping standards for delays between contractor and project owner.
- Notice of claims / claims for additional time - This is the formal process of submitting any delays. Claims can come in the form of a change order or can be a more formal process that includes legal.
When reviewing a contract, be sure to pay attention to any specifics around delay claims. Are they compensable or not? Must they be properly documented for compensation to be disbursed?
Communicate with Your Contractor
Have you as the project owner received proper notice about expected delays? This is an area where contract review and project owner and contractor communication meet. Ensuring strong communication between a project owner and contractor enables updates to be shared quickly, while also minimizing misinterpretation of the contract.
Now is the time to spend ensuring that there is proper documentation and notification of all delays and claims. Ensuring proper documentation and notification is happening today will make future processing of claims easier. This will also allow for project owners to create a clearer picture of what to anticipate in the coming months.
Lastly, review your organization’s bonding protection for contractor and subcontractor defaults. The disruption from the COVID-19 virus pandemic could have a devastating financial impact on companies. If a contractor or subcontractor on your project goes out of business, what protections does the contractor or project owner have to ensure that another contractor can be brought on to the project without affecting the substantial completion delivery date? It will be important for all parties to understand their coverage in this area and adjust their project expectations to account for the increased risks that may be coming in the wake of the pandemic response.
Another factor to keep an eye on will be the recovery process. As business picks up again, expect an increase in claims from contractors. Having proper documentation and communication now will ensure that this process is smoother. It is important to review and audit claims increases and changes to ensure that among all the chaos, now and in the future, that payments are accurate and proper protocol was followed when citing claims and delays.
An experienced construction cost review provider can help project owners navigate the complexities that may arise during this time. If we can be of assistance, please contact us.
Looking for more COVID-19 resources? Visit our resource center for expertise on impacts to expect and how your business can respond.
Mark McCarthy is a Managing Director in the national Risk & Advisory Services practice for CBIZ, Inc., specializing in construction cost review and consulting. He can be reached at 617.761.0627 or firstname.lastname@example.org.
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