The economic fallout of COVID-19 is forcing contractors to juggle their need to keep employees safe while at the same time keeping projects running efficiently.
That means, no matter how hard we try, there will inevitably be impacts to construction projects and contractors will need to submit requests for extras to recover damages. And, while COVID-19 seems to be changing almost everything, it hasn’t impacted the legal basis for claiming damages or the requirement of needing to link project damages with accounting records.
The ability to recover damages is dependent on two things. The first relates to having a legal basis for recovery and the second being able to link the damages to the event.
What contractors need to track to be eligible to recover
Contractor impacts caused by the current pandemic potentially include the following:
- Suspension of the work
- Termination of the work
- Equipment supply disruptions
- Late delivery of materials required to complete the work
- Partial delivery of materials required to complete the work
- Cancelled delivery of materials required to complete the work
- Lack of workforce to proceed efficiently
- Labor productivity impacts caused by social distancing
- Labor productivity impacts caused by unavailability of complete crews and workforce caused by illness, quarantine, owner restrictions and/or governmental restrictions
- Medically testing employees showing up for work and periodically during the day
- Supplier and subcontractor defaults/bankruptcy
- Demobilization and remobilization to project sites
- Price escalation upon restarting projects
- Standby mode costs
- Lack of timely site inspections by governmental agencies
- Project delay costs
- Acceleration and constructive acceleration
How to prove contractor impacts
Contractor impacts will need to be proven with actual project and accounting records to support claimed damages. The impacts should be evaluated on a project-by-project basis, and contractors should start collecting data now to prove the impact and damages you are currently incurring.
Waiting until after COVID-19 is over will create added expense and might not identify all of the specific impacts and costs. Contractors should document, document, document what is happening on every project each and every day. Daily reports should describe the impacts each and every shift and each and every day.
This starts with making sure you have a solid basis of the current project status as far as percentage complete and costs incurred before any impacts occur. Pictures and videos of the project should be taken to document the work installed at the time of any impacts.
To the extent specific identifiable costs can be tracked separately, new cost codes should be established with expenses and labor charges being posted directly to the new cost code. As an example, the cost of testing employees for the virus and the time involved can and should be tracked contemporaneously in newly established cost codes.
Not all impacts will easily allow for discrete tracking in newly established cost codes. Labor productivity impacts fall into this category and may require improved tracking of daily productivity and daily impacts on productivity. A contractor may also have an obligation to mitigate their damages. If they are not able to obtain materials from one supplier can they prove they attempted to obtain materials from another supplier?
Documenting will not be enough alone. Contractors must also prove the legal right to recover the damages.
While future executive orders or legislation could change the process, for now, the first step is to discuss your situation with legal counsel to determine your rights of recovery for project impacts. While many are discussing “force majeure” clauses, that generally does not allow contractors to recover damages.
Instead, contractors may find legal footing in other contract clauses. Contracts generally require notice be provided to preserve your rights to claim damages. The determination of legal recovery will be fact-specific and job-specific—so pull out all your contracts and start reviewing them.
Laws in the jurisdiction where your project is located or the laws governing your contract will also impact your basis for recovery and should be considered when giving notice of an impact to your project. You should seek out legal counsel who can wade through your contracts and project information to assist in determining the best path under the law toward recovery of damages.
Contractors should also ask their insurance agents if there is potential recovery through various insurance policies. Business interruption insurance, builders’ risk (all risk) insurance and delayed start up insurance are a few of the policies that might provide options for damage recovery.
If you have any pending contracts, you might want to consider adding language regarding government-required quarantines or shelter-in-place orders. You might also consider covering material and equipment availability, and delivery impacts.
While we are currently in a never-before-seen situation and expect the construction industry will change in the future, we can be assured that one thing which will not change—the requirement to support recoverable damages with project and source accounting records. The best time to document and collect your damages documentation starts now, when contemporaneous records can be collected and maintained.
About the authors
Michael R. Benes, CPA, CFF is a partner in the construction and real estate practice at Wipfli LLP, providing consulting services including operation improvement studies, strategic planning, dispute resolution, and litigation support to construction industry clients. He has worked almost exclusively with construction industry clients for over 30 years.
Kevin P. Krueger, CPA is a senior manager in the construction and real estate practice at Wipfli LLP. He has more than 30 years of experience, including both public accounting and industry experience. For the last two decades, Kevin has been providing consulting and litigation support services to the construction industry and often appears as an expert witness.