When Coronavirus Delays Construction, Who Foots The Bill?
Job sites across New York have been humming with activity since the city lifted its ban on construction in early June. After two months of waiting, teams whose projects were not deemed essential during the shutdown are now diligently forging ahead to keep their construction timelines as intact as possible while observing social distancing precautions.
But the relative calm at many job sites belies an underlying tension. Weeks and months of delays may have added up to millions of dollars in extra costs. For many owners, contractors and subcontractors, the question of who is going to foot the bill for those expenses is still a point of contention.
According to Mike Castellon, leader of the construction dispute practice at real estate law firm Rosenberg & Estis, most negotiations he has seen have been amicable. But if the issue of who pays remains unresolved, those negotiations could devolve into confrontations.
“So far, the attitude has been, ‘We’re all suffering together, we need to cooperate,’ but at some point, there’s not enough money to do that,” Castellon said. “A year from now, people could feel a lot differently.”
The question of who is liable for construction delay costs has sent owners and contractors scouring their contracts and has prompted new and unorthodox lines of legal reasoning, Castellon said. The disputes raised by two months of construction delays could take years to play out in internal negotiations and, if it comes to it, the courts.
What’s On The Books
Many construction projects in New York were shuttered through April and May, either because they were deemed nonessential or because the owner chose to halt construction during the shutdown. Some essential projects also had to shut down for a few days of intensive cleaning if an employee tested positive for COVID-19.
These sorts of delays are usually accounted for by force majeure clauses. Most of the boilerplate contracts used throughout the construction industry include a force majeure clause that protects contractors from being held liable for construction delays due to extraordinary events — things like hurricanes, riots and, yes, epidemics.
But while these clauses give contractors more time to complete a project, they typically don’t allow for more money. Contractors and subcontractors are still expected to complete their work within the same budget and don’t have legal recourse to demand more cash from owners or developers.
During the two months of delays, construction companies in the city may have racked up enormous bills for materials and equipment, extra labor, storage or rent on the job site. Even though they are going back to work, that doesn't mean they can make those payments.
“An owner may want to start construction up again, but one subcontractor might be begging for relief because they’ve lost millions of dollars and could go out of business if someone doesn’t write them a check,” Castellon said.
Depending on how far along the project is, contractors and subcontractors may be able to leverage owners and developers to cover at least part of the cost of delays. After all, those expenses may be cheaper than finding a new contractor to step in and complete the project. But owners are facing their own slew of new costs, from the increased cost of capital and higher insurance premiums to the real-dollar costs of delaying tenants’ eventual move-in.
Any negotiations over splitting the costs of delays are likely to be contentious, but Castellon expects that the parties should be able to work out payments in a nonadversarial manner in most cases.
“Owners will likely stick to the contracts and give extra time but not extra money,” he said. “But we’re talking about really large-dollar impacts, and there will be some people that won’t take no for an answer.”
While disputes have been rare so far, Castellon said he has seen some teams pursue unconventional legal strategies to try and shift the burden of construction delays. Teams that represent some subcontractors have argued that the scope of the coronavirus pandemic should override the contract entirely.
“These teams are saying, ‘The fundamental principle of the contract has been thwarted by the virus, throw it out and do what’s fair,’” Castellon said. “They’re arguing that no one can anticipate the zombie apocalypse.”
Castellon said these sorts of arguments would likely have no legs in court because force majeure clauses cover exactly the scenarios these attorneys describe.
Some owners and construction companies alike are hoping that business interruption insurance will be able to cover the costs of delays. However, pandemics are not typically covered in insurance agreements, Castellon said, though a company that specifically asked to be insured against pandemics may have some recourse.
While there have been calls for the federal government to pass legislation that would force insurers to cover business interruption insurance, a move to bankrupt insurance companies in favor of the insured would likely be deemed unconstitutional, Castellon said.
However, Castellon did admit that the coronavirus has opened up avenues for this sort of “creative lawyering” and that the next few years could set new precedents in the world of construction disputes, depending on how a few select judges rule.
This feature was produced in collaboration between the Bisnow Branded Content Studio and Rosenberg & Estis. Bisnow news staff was not involved in the production of this content.