Skip to main content

Bankruptcy Risk for Contractors Caught in the COVID Squeeze



The global pandemic has had an unprecedented impact on the economy and the construction industry in particular. This includes supply chain delays and wild fluctuations in the price of building materials like lumber and steel. Just recently, Katerra filed bankruptcy declaring that it was a COVID-impacted decision. Who should pay for these impacts?

Contract May Allocate Impact

If the parties anticipated the pandemic and price fluctuations, it may be addressed in a Force Majeure clause or other allowance for time or cost impacts. The key is to make timely notice and claim submission if the contract controls these events. Second, document the impacts to support the claim. In short, regardless of the merits, submit a claim for additional compensation and give the owner and/or general contractor the chance to pass the cost through to the party on the jobsite best positioned to address costs since the owner also benefits from the increased value of property resulting from improvement of the property.

Risk Not Allocated

If the contract is silent or ambiguous, do not give up. The common law and implied terms provide potential grounds for recovery. These theories include constructive acceleration, breach of implied duty of good faith and impossibility/improbability.

Constructive acceleration is triggered on the theory that the owner is requiring the contractor to perform when an excusable delay condition exists on the project, namely COVID-19. Owners want their projects to proceed and direct the contractor to perform under conditions in which the work is hampered by social distancing (especially for elevators), personal protective equipment must to be used, supply chain inefficiency, or labor availability is impacted. Some contractors are projecting 30-50 percent efficiency losses caused by COVID-19. Rather than waiting for these conditions to subside, the owner is directing the work to continue consistent with the existing schedule. Under these circumstances, equitable adjustment should allow additional compensation and time, similar to a demand to accelerate construction.

Similarly, a contractor can argue implied duty of good faith and fair dealing. The owner has a duty to provide unencumbered access to the construction site. If the owner impedes the contractor’s ability to perform the work without formally suspending the project, the contractor may be able to assert a compensable delay claim on the basis that the owner has breached the duty to make the site available. See C.W. Bignold v. King County, 65 Wn.2d 817, 399 P.2d 611 (1965) (Implied condition of not interfering with work of subcontractor and delays entitle the contractor to extra compensation).

Under the common law or UCC impossibility doctrine, if a party’s contractual performance becomes impossible due to an extraordinary event, they are excused from the contract. The same rule applies if performance has suddenly become so much more difficult and dangerous than expected as to be “impracticable” (meaning essentially impossible). Each of these are an expansive topic and are addressed in other blog posts and should be considered carefully.

Practice Tips

To adequately preserve the right to get paid, shrewd contractors are:

Documenting, documenting, documenting impacts whenever and wherever they arise. Be sure to maintain detailed records related to delivery delays, manpower shortages, changes in productivity, vendor changes, and other impacts, including steps taken (regardless of outcome) to mitigate such impacts.

Report these impacts on the daily reports. You should consider setting up a cost code to track time/activities. These impacts should then be tendered up the construction chain for additional compensation based on the different options outlined in the blog post.

Finally, remember that both sides to a construction project benefit from teamwork to resolve unexpected delays and impacts. This includes negotiation of unexpected increased costs to keep the project moving rather than asserting breach or termination and staring down the prospect of a lawsuit that may tie up both parties for years to come.

  Edit this post