COVID-19 to Spur Construction Delay & Disruption Claims

As the rapid spread of COVID-19 globalizes, economies and industries are already feeling the effects of disruption and delay - reeling from it, many forced to lay-off their staff. Since some 50% of the industry are small to medium sized specialty trades, they are especially vulnerable to losing it all. However, the industry can’t have a future without specialty trades. Since we know this, we can begin to imagine industry recovery plans. As always, failing to plan will be planning to fail.

The majority of the March 2020 $2T federal stimulus bill, or rescue package, is intended to cover one-time $1,200 payments to families with less than $75K annual income, extension of unemployment benefits, and to boost the medical industry’s response and capabilities. As yet, it is unclear how much of the bail-out bill will go to industries not mentioned in the bill, such as the building industry, which must compete with other industries all in dire need, and all competing for subsidies. Economists speculate that this first bill will barely put a dent in the overall economic impact - more aid will have to be provided.  

The construction industry is taking the pandemic on the chin. The industry comprises about 6.4% of the US GDP, and employs some 7.6 million workers. Since the full impact of project shutdowns and layoffs hasn’t peaked yet, it’s impossible to know just how damaging the pandemic will be to construction. Many economists posit an unemployment rate as high as 20%, which would sideline a minimum of $1.5 million construction workers - 10% of those working in NYC.

The $2T stimulus package includes $150B in loans for states and local governments, $58B to the airlines, leaving $150B for the remaining competing industries. However, the travel industry alone asks for $150B. The bill earmarks several industries - education, farming, health services, distilleries, but does not directly mention construction. Developers will be able to receive tax-credits that can enable them to put their projects back on line. 

The bill rewards companies for retaining payroll during the pandemic - up to $5,000/employee. Large scale builders have deeper pockets than mid- or small scale builders, who will be most adversely affected. Companies who let go their staff will be at a disadvantage to those which manage to float - they will lose talent to competitors and have difficulty restaffing. As the virus eventually subsides, big builders will be the last-man standing, with or without help from a bail-out.

While builders and owners can’t yet see the end in sight, that doesn’t mean they can’t prepare by planning their responses to different scenarios. Those who fail to plan will be in poor positions to defend or prosecute disruption and delay claims. 

It’s up to state governors to advise which industries are “essential” as Governor Cuomo has done in New York, including some of the construction industry as exempted from mandated shutdowns. Though this may change, some sites have already shut-down, while others operate at reduced capacities, perhaps putting their employees at risk. If sites are not active, neither are the management personnel.

In terms of delay and disruption claims made by those companies that survive the economic impact of the pandemic, it is inevitable that these be negotiated before work resumes. Contractors will make compensable EOTs to ownership for their losses. Owners will argue these, and likely make their own claims with insurers, and at the same time negotiate their financing from lenders. Some owners will be tenacious - taking advantage of contractors most of whom can’t make coherent claims.

Whether COVID-19 contractor delay or disruption claims go into negotiation, arbitration, or litigation, depends on the integrity of the claims they make. Traditionally, all contractors but the most meticulous have been hard put and feckless to make EOTs - especially disruption claims. For that reason, they are seldom made, and only a fraction of those granting added contract duration. Remunerative compensation is virtually unheard of: advantage - owners. However, COVID-19 disruption is too big to ignore.

The reason so few EOTs are successful has to do with the way in which contractors present their claims. In order to gather the data, they need to monitor their projects and production closely. Most don’t do a comprehensive job of it, if they do it at all. The more data they have available, the better chances they have. Contractors who don’t plan, estimate, and track production from estimating through build-out simply won’t have the data for a compelling claim. They can resort to measured-mile, industry studies, and peer projects, and other methods, all of which have decreasing levels of efficacy.

Delay claims are relatively easy to quantify because they typically are defined by suspend and resume dates. The delay may be for an entire project, a specific trade, or a sequence of activities. This data should be relatively simple to calculate, even if the information has to be resurrected from initial project estimates. Thus, total shut-downs are a zero-sum equation.

Once the delay data is gathered, it has to be converted into a claim, which will be challenged by owner’s consultants, or attorneys. The timeline of a delay is a point of fact, and easy to agree on. However, a contractor’s delay must calculate the rate of production in the disrupted work. This is never so simple as repeating the proposed rates with which he generated his schedule, as those were prospective. Optimally, a claim based on either measured-mile baseline productivity analysis, earned value analysis (EVA), comparison studies approaches net the highest returns.

The same is true of disruption claims, however, these are complicated because work may be continuing, despite diminished work-force, limited access,or equipment and materials. In order to figure this sum it is necessary to know the established rates of production, or work-in-place. 

According to Derek Nelson (i)

“The attraction of the measured mile is that the actual contract performance rather than the initial estimate is used for the calculations. As such it compares actual performance on site with actual performance, not some theoretical planned performance." 

When there is insufficient documentation to model project based methods, industry-based studies and research are the next choice. Such claims will be easier to build, however, they are far less efficacious than project-based methods.

The next level of approach to claims pertains to cost based methods, such as total cost, or modified total cost. Nelson says of these

“The major difference between the total cost and modified total cost methods is that damages quantified by modified total cost calculation takes into account unreasonable estimates and/or inefficiencies due to contractor’s problems. Thus, the second method, out of the two, is preferable.  

Once the value of the claim can be assessed, it can be presented as a compensable EOT. The elephant in the room will be the apportionment of liability based on a force majeure event, for which an owner may not be held accountable. Many contracts have no damage for delay clauses, and others have liquidated damage clauses. Both of these can gum up the works of claim negotiation, and further forecast backlog in the court systems for unsettled claims.

The best scenario for all of us would be a flattening of the pandemic curve, and an imminent vaccine to prevent reinfections. The time-frame for either of these depends on a lot of things going right. So far, from a lack of PPE for medical workers, to a shortage of hospital rooms and respirators for patients, no one is waxing optimistic. 

i The Analysis and   Valuation of Disruption by Derek Nelson, Senior Vice President & Regional Managing Director – Asia Hill International, Inc., 25 January 2011

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