The damage and fallout created by the COVID-19 pandemic with regard to the global construction industry is simply staggering. The European Construction Industry Federation (FIEC) recently requested that the COVID-19 pandemic be deemed a national “force majeure” event by the executive branch of the European Union. If this were to happen, contractors could focus on getting back to actual construction work, once the stay-at-home orders are lifted. Here’s how a federal force majeure measure might work in the US – and the benefits and challenges of implementing one for the construction industry.

What is force majeure?

Force majeure is typically a construction contract clause, which relieves the contractor or subcontractor from their contractual obligation due to certain “uncontrollable acts.” These acts can include natural disasters, labor strikes, acts of war, and potentially pandemic outbreaks. A government measure of force majeure would address all delays and contract breaches caused by COVID-19, for all affected contractors, project owners, and project funders.

The US contractors will be facing nearly identical issues as their European counterparts are now. Unlike many other occupations, contractors cannot work remotely. So virtually every construction project is now dealing with project delays ranging from 30 to 120 days.

A call for EU to declare force majeure

On March 23, 2020, he European Construction Industry Federation (FIEC) published a press release stating that  “immediate action by the EU Commission is needed to ensure that COVID-19 is considered a force majeure, to eliminate penalties for companies that have to suspend work; and to increase European funds to cover the increased costs of the work.”

The FIEC asked the European Commission for three actions to support the construction industry:

  1. Publicly announce, that the COVID-19 pandemic is a case of “Force Majeure” and has to be treated accordingly by all construction employers and clients.
  2. Warmly recommend to the Members States that they allow the possibility of suspending or reducing ongoing construction, without penalties and taking into consideration damages, for the period necessary, if the responsible contractor is unable to comply with the requested health and safety measures for its workers and/or if he is unable to undertake activities because of disruption in the supply chain or because of the shortage/lack of personnel due to Covid-19. The possibility of waiving delay penalties in public procurement contracts is already mentioned in the Eurogroup statement of 16 March 2020.
  3. When ongoing construction projects are co-financed by the European Union, immediately allocate specific resources for covering the additional costs generated by the Covid-19 pandemic (extra security of worksites, costs related to changes in organisation and new time schedules on worksites, overheads,…). Encourage the Member States to do the same at national level.

 

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The Cost of COVID-19 for US Contractors

Project delays, of any kind can be extremely expensive for contractors:

  • Delays can cause breach of contract issues, resulting in fines and penalties for not hitting milestones or completion date
  • Building permits have to be renewed, as they expired due to the work stoppage
  • Temporary services (power, lifts, and trash) have to be extended
  • Seasonal weather impacts job site access/production

The COVID-19 pandemic has also ushered new jobsite safety standards into place, literally overnight. Since these costs weren’t included within the original contracts, they are being paid for by the contractor. Depending on the size of the project, this expense could easily run into thousands of dollars that can’t be recovered by the contractor.

For every construction project considered essential business that didn’t shut down, a contractor has had to immediately spend money on additional cleaning and hygiene supplies, safety gear, and other expenses to meet local guidelines and requirements.

And as each project re-opens, another contractor will have to start spending money for the same items and the same reasons.

In addition, the production line stoppages will be responsible for material shortages within the next 3-6 months. These shortages will cause prices to go up, and the contractor currently has no recourse to recover these unforeseen costs, either.

The immediate future is looking pretty bleak for the US contractor. Without some relief or protection from enormous potential financial harm, many contractors will be forced to simply close their companies, and just walk away. This is the exact same thing we saw with the Great Recession (2007-09), when countless small to medium sized contractors shut their doors forever.

Benefits of a national force majeure measure

A national force majeure decree would be a huge boon for the US construction industry.

  • Without the threat of legal action to deal with on every project, contractors can focus on getting projects back online and moving forward again.
  • Additional safety measure costs, as a result of COVID-19 can be recovered.
  • Increased material price costs could be recouped by the contractor as well.

In essence, a national declaration of force majeure would simply overwrite the dates of all construction contracts, affected by COVID-19. The lost time is just that, lost time, and it’s nobody’s fault. This would literally allow tradesmen on every project to pick up their tools and go right back to work!

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