With COVID-19 disrupting nearly everyone, this month's newsletter focuses on the construction impacts from the virus.  From contract interpretations to diminished construction activity, this virus is presenting unprecedented challenges.  The following articles will hopefully provide you with additional insight as we continue along in this 'new normal'.  

We hope you and your family are, and remain, healthy!

The Dotted Line: 4 ways to interpret construction contracts amid coronavirus
by Kim Slowey, April 28, 2020

There are many aspects of the construction industry that have been impacted by the COVID-19 pandemic. Construction companies have been confronted with new concerns around worker safety; their clients are pulling out of projects or, at the very least, delaying them; some local and state governments have ordered a halt to most construction activity; and many contractors and subcontractors are trying to figure out how they will meet their financial obligations until work ramps up again.
These unprecedented times also have raised questions about what kind of relief contractors might find in their construction agreements from issues related to the pandemic.

The American Institute of Architects (AIA) held a webinar recently in an effort to provide some answers using the A201 - 2017 General Conditions of the Contract for Construction form as a guide. Although this document primarily comes into play in agreements between an owner and a contractor, it is also incorporated by reference into other documents like the AIA’s A401 - 2017 Standard Form of Agreement Between Contractor and Subcontractor.

Beside these primary AIA contracts, construction companies also use altered versions of AIA contracts or ones from ConsensusDocs, the Design-Build Institute of America and others. Contractors should review their contracts to make sure they know which ones they have and their terms.

After giving fair warning to attendees that there isn’t yet existing pandemic-related case law to help determine how COVID-19-related disputes might be decided, the moderators, Michael Koger, director and counsel of AIA Contract Documents and Risk Management, and James Germano, manager and counsel of AIA Contract Documents and Risk Management, offered some major takeaways. After the event, Construction Dive reached out to other construction attorneys to ask them to expand on what Koger and Germano presented.

1. Defining force majeure clauses

Force majeure clauses provide relief from certain contractual obligations during unusual and impactful circumstances, but when they are narrowly written and list specific events as triggers for force majeure claims, it's less likely they will cover pandemic-related issues, Germano said.  These clauses also don't have to use the phrase "force majeure" to deliver the same relief.

“The more narrowly you define the instances in which force majeure could be claimed, the more circumstances that are not listed get excluded from the application of the force majeure clause,” said attorney Quinn Murphy with Sandberg Phoenix in St. Louis. “The broader you define it, the more likely events that are not specifically enumerated get included in that provision.”

In addition, he said, historically, force majeure is asserted very rarely. In 20 years of handling construction-related cases in a pre-coronavirus landscape, Murphy said he has only litigated the applicability of a force majeure provision three times.

“Now the question is going to be whether everybody gets a kind of blanket, force majeure justification for not meeting project milestones or not delivering the project on time? I think all of us, in the back of our minds, believe that there will be some application in that regard," he said. "But until a court rules on it, we don’t have a lot of precedent for the impact of a pandemic.”

Attorney Michelle Schaap, of New York City-based Chiesa Shahinian & Giantomasi, told Construction Dive that when she drafts a contract, she tries to capture as many eventualities as possible, including changes in the law, which would encompass government-mandated shutdown.

“The devil is in the details as to what contractual rights and obligations each party has,” she said.

2. Preparing for no allowances

Even though the COVID-19 outbreak was not anticipated and has forced them to, at best, operate under difficult conditions, contractors must still follow notice requirements and other terms of their contracts, Germano said during the AIA webinar.

“I am telling my contractor clients,” Murphy said, “that while I do think that there is going to be some accommodation made for this thing, not to make the assumption that owners and upstream contractors are just going to kind of see the writing on the wall and decide to give everybody slack and not fight back with delay and breach of contract claims.”

So contractors that prepare as if there are not going to be allowances, document jobsite activities and reasons for delays, as well as meet all notice requirements in writing, he said, are in a much better position to prove how the pandemic impacted their operations than those who assume that everything will just work out.  Read More

AIA index points to major downturn in commercial construction
By Jenn Goodman, April 23, 2020

Dive Brief:
Demand for design services from architecture firms recorded its largest-ever monthly decrease in March, according to The American Institute of Architects (AIA).​ Billings at architecture firms plummeted last month as the Architecture Billings Index fell by 20.1 points to a score of 33.3, the largest single-month decline in the index's nearly 25-year history, far surpassing the declines of 9.4 points seen at the start of the 2001 recession and 8.3 points seen at the start of the Great Recession.
Released yesterday, the index reported that billings declined across all regions of the country and all firm specializations.​ In addition, new project inquiries and new design contracts experienced a steep decline as well, posting scores of 23.8 and 27.1, respectively.

The dramatic drop in demand for architecture services portends an equally dire future for the construction sector, according to Dodge Data & Analytics Chief Economist Richard Branch, who said he expects construction starts in the second quarter to post a drastic decline. "A pullback in new jobs and delays to ongoing projects will lead to a sharp retreat in activity across virtually every sector of the construction industry," he told Construction Dive.

Dive Insight:
Associated Builders and Contractors Chief Economist Anirban Basu also sees a steep decline in activity for U.S. commercial builders. He told Construction Dive he believes it will occur in three phases.

Phase one includes the current impact of social distancing directives and other CDC recommendations on construction activity, as well as shutdown orders in Boston, Pennsylvania and California.

Phase two will be the result of the downturn of the U.S. economy, which will bring the deepest recession since the Great Depression, he said.
"Construction activity tend
s to lag the broader economy by 12 to 18 months, so that weakness will eventually catch up with the construction sector," he said.

ABC's latest Construction Backlog Indicator released earlier this week suggests that backlog is already under pressure, falling 7.7% to 8.2 months in February. In addition, its most recent Construction Confidence Index, based on a survey of members conducted March 20-31, revealed that contractors' expectations for sales, profit margins and staffing levels fell below the threshold of 50 for the first time in the history of the series.

The AIA data indicates that phase two could begin sooner than expected, with many projects being canceled in large numbers and many project owners likely invoking force majeure clauses in contracts in order to avoid the costs of cancellation that normally accompany such decisions, Basu said.

Phase three involves a longer-term malaise in construction activity as empty storefronts and office suites remain pervasive for years to come.​​

In an AIA survey of members released late last month that asked firms to project their losses through the end of the second quarter of 2020, 94% of responding firms indicated that they expect a decline in revenue during that time, with more than one-third anticipating losses of 25% or more. On average, architecture firms now expect revenue losses of 17% over the next three months.

Force majeure clauses take center stage in contractors' coronavirus response
By Trent Cotney, March 16, 2020

With no end currently in sight to the extensive global outbreak of the novel coronavirus — officially named SARS-CoV-2— the U.S. construction industry is already experiencing effects and should brace itself for more to come.
One serious implication of the pandemic is its impact on Chinese production, as mass public quarantines, curfews, and travel restrictions implemented to help fight the spread of the disease have crippled manufacturing and shipping sectors, among others.

Thus, the question surrounding construction supply-chain problems reverberating from China’s efforts to fight the coronavirus epidemic is not a matter of if, but when, the effects will hit the U.S. construction industry, how extensive they will be, and how long they will last.

Among the ramifications U.S. companies can expect to begin feeling, if they haven’t already, include higher costs and price fluctuations, material shortages, logistics breakdowns, order cancellations and extended delays in product fulfillment and shipping, ultimately leading to slower project completion times and potential legal squabbles with both suppliers and project owners down the road.

Contractors are urged to begin preparing for these effects now by evaluating their own supply chains from end to end to identify vulnerabilities, identifying potential alternative supply sources, preparing for costs to soar, and making sure they have adequate provisions in their contracts to protect themselves from the increased costs and supply chain delays and interruptions that are threatening the construction industry due to the ongoing coronavirus epidemic.

Force majeure clauses

One of the ways contractors can seek to protect themselves is by including a “force majeure” clause in their contracts. A force majeure clause is a contractual provision that allocates the risk of performance if performance is delayed indefinitely or stopped completely due to circumstances outside of a party’s control which make performance impossible, inadvisable, commercially impractical or illegal and provides notice to the parties of the types of events that would cause a project to be suspended or that would excuse performance. 

One of the ways contractors can seek to protect themselves is by including a “force majeure” clause in their contracts. A force majeure clause is a contractual provision that allocates the risk of performance if performance is delayed indefinitely or stopped completely due to circumstances outside of a party’s control which make performance impossible, inadvisable, commercially impractical or illegal and provides notice to the parties of the types of events that would cause a project to be suspended or that would excuse performance.

The purpose of the provision is to relieve a party impacted by the force majeure by extending, temporarily suspending or terminating the contract due to unexpected and unavoidable events such as “acts of God,” including hurricanes, tornadoes, floods, earthquakes, landslides, and wildfires, and certain man-made events like riots, wars, terrorism, explosions, labor strikes, and scarcity of energy supplies. To be classified as a force majeure event, the event must be beyond the control of the contracting parties, it cannot be anticipated, foreseeable, or expected, and the event must be unavoidable (irresistibility).

Without a force majeure clause in place, in some jurisdictions both the owner and contractor would share the risk, but in many others, the risk falls on the shoulders of the contractor for the increased costs caused by material shortages and higher prices and project completion delays due to these unexpected and unavoidable events outside of their control. Thus, anything that cannot be anticipated while drafting the contract and factors that could impede progress should be negotiated between the parties and addressed via a force majeure clause added into the contract.

Read More

Innovative ventilator device developed by Prisma Health to quickly increase ventilator capacity for COVID-19 patients

Prisma Health, March 25, 2020

Prisma Health announced today that it has received emergency use authorization from the U.S. Food and Drug Administration (FDA) for VESper™, a unique ventilator expansion device that allows a single ventilator to support up to four patients during times of acute equipment shortages such as the current COVID-19 pandemic. Produced using 3D printing technology, the device is developed with material already in use for medical devices and produced at minimal cost.

Prisma Health experts are working with national COVID-19 teams who have no more ventilator capacity and who can initiate emergency use of the prototype.  We will be working closely with these teams during their field testing to monitor clinical outcomes.  Those field tests will determine whether the device performs as designed, per FDA guidelines.

Emergency use authorization can offer critical care patients access to a medical device that has not gone through normal FDA approval; this is used when no comparable or satisfactory alternative options are available.

“When we see rapid increases in patients who require machine-assisted breathing, an acute shortage of necessary equipment can happen overnight,” said Peter Tilkemeier, M.D., chair of the Department of Medicine at Prisma Health-Upstate. “The VESper™ device can be lifesaving when the number of critically ill patients requiring breathing support is greater than the number of available ventilators. A number of U.S. hospitals are likely to begin experiencing this with COVID-19.”

A Prisma Health emergency medicine physician realized the opportunity of using a single machine to breathe for multiple patients. Working collaboratively with her husband, a software engineer and with a Prisma Health pulmonary critical care physician, this team began developing specifications for a “Y” splitter tubing that would meet international quality standards (ISO), be easily produced, allow for appropriate filtering of bacteria and viruses in the ventilator tubing, be strong and impact resistant, and would not impact the care of other patients connected to the same machine.

“Immediately, we realized we had an opportunity to impact patient outcomes all over the country, and potentially beyond the U.S.,” said Marjorie Jenkins, M.D., chief academic officer for Prisma Health–Upstate and dean of the University of South Carolina School of Medicine Greenville. “What we needed was a collaborative team to put the plan in motion and close the loop between design, production, FDA approval and distribution to hospitals with critical need.”

Drawing on the strength of Prisma Health’s existing academic partnerships, specifications were sent to engineers at Clemson University and University of South Carolina for 3D materials testing and printing of prototypes. The team began working to secure FDA approval and collaborations with private sector businesses came together within a matter of days.

Physicians used Prisma Health’s Healthcare Simulation Center to begin testing the VESper™ device with medical manikins, allowing for the simulation of multiple clinical scenarios. The device was able to deliver the appropriate breathing parameters without difficulty, creating an opportunity to pursue an application for emergency use authorization with the FDA to rapidly bring this life-saving device directly into clinical use.

Hospitals can begin to apply to receive the free source code and printing specifications for the device today by registering on Prisma Health’s Website for their use in printing the VESPer™ device. Prisma Health is collaborating with other major companies such as HP Inc. and its Digital Manufacturing Network to quickly scale 3D production of validated parts for distribution in areas of greatest need and areas with the potential to exceed their ventilator capacity in the near future, such as COVID-19 “hot spots” as designated by the Federal Emergency Management Agency (FEMA). Currently Prisma Health and South Carolina hospitals have enough ventilators available for patients.
“This is an exemplary demonstration of rapid innovation and collaboration,” said Mark O’Halla, president and chief executive officer of Prisma Health. “I am so proud of the creativity and perseverance of our clinical team who came together to develop a potentially life-saving solution at a critical time for our country, our communities and our patients. We are anxiously awaiting the results of the prototype field tests.”

Will Contractors Limit Weather Risk With Indexed Insurance?

By Scott Van Voorhis and Richard Korman, January 29, 2020

A winter nor’easter, described in the media as “snowzilla” because of its historic proportions, slammed the U.S. mid-Atlantic states on a January weekend in 2016, dumping more than 2 ft. of snow on New York City. At times, winds exceeded 35 mph. Among the projects where heavy accumulations had to be shoveled the following Monday was Manhattan’s sprawling Hudson Yards mixed-use development. Photos (see cover) show crews doing the shoveling and a crane being used to remove the snow.

It isn’t clear if contractors at work there, such as Tutor Perini Corp., were affected, since the public company’s financial reports contain standard warnings about how weather can affect revenue and profitability. The company’s filings make no special mention of the blizzard, and the firm did not return a call for comment.

But the complications of figuring out how much snow actually fell can be appreciated by the amount of time it took the National Weather Service to fix the final totals. Four months after the storm, the service declared the readings in the city’s Central Park and at nearby Newark (N.J.) Liberty International Airport to be slightly off, blaming measurement errors and miscommunications.

Reliable weather data is at the heart of parametric weather insurance, a popular form of coverage in the energy sector that insurers and brokerages believe could gain traction and alleviate some risk for those in construction and engineering. While what is reliable data is not always 100% clear, such coverage feels especially important amid stronger signs of climate change and the more turbulent weather patterns it is driving.

“We are seeing parametric insurance gradually taking off,” says Nigel Brook, a partner at Clyde & Co., a London-based legal practice. “It’s not the kind of thing where a customer says ‘I want parametric insurance.’ It is usually a thing they find their way indirectly to.”

Weather insurance of all kinds has a long track record in energy, agriculture, events and retailing. Just what it can mean for construction isn’t clear yet. Parametric insurance can provide an extra level of protection for contractors and project owners. One attraction is its seeming simplicity, with a clear trigger to a comparatively quickly delivered payout and no convoluted claims process, participants say.

While a builders’ risk policy, which covers property damage during construction, can run to dozens of pages in length, parametric policies can be as short as 10. Parametric insurance is designed to eliminate the cumbersome claims process and the myriad exclusions that can lead to disputes, but it is hardly foolproof.

Stay Tuned....

for next quarter's Fort Hill Associates Newsletter. 

If you have questions in the interim, please contact us:  
Copyright © 2020 Fort Hill Associates LLC, All rights reserved.
Our mailing address is:
Fort Hill Associates LLC
37 Villa Road, Suite 106
Greenville, SC 29615

Add us to your address book
Email Marketing Powered by Mailchimp