Amidst ongoing government shutdowns, customer-mandated delays, supply chain changes, and new safety requirements to re-open and work on job sites, you may have many questions about who will pay the additional job costs that will be incurred due to the impact of COVID-19.
Many contracts include a force majeure clause which limits both parties’ obligation when extraordinary circumstances occur beyond their control for the duration of the event. However, some of the increased costs that are being incurred by contractors related to COVID-19 may be recoverable, depending on the contract provisions. It will not be easy to recover these additional costs during these uncertain times, but with the right approach it can provide for higher success rates.
It is important to understand change order management as you navigate the new job conditions due to COVID-19.
1. Review the contract and safety plan
The first step is to review the agreed-upon scope of work, paying attention to clauses regarding change orders or those that could result in a change order. There are often conditions regarding the timeframe for initiating a change order, specific information and documentation requirements, and authorized approvals of change orders.
Review the updated work requirements and safety plans. Identify risks and ensure the job is safe, and determine what additional resources and time are needed on the job. Any concerns and additional costs should be discussed with the owner or general contractor at the onset.
It is also a good idea to have open discussions with your contract attorney. They can help you evaluate the rights on your existing contracts and provide guidance on changes you should make to new contracts, because COVID-19 is no longer something new and unexpected.
2. Recognize items that may qualify for change orders
The following is a list of possible change orders that may apply during COVID-19:
- Cost to demobilize/remobilize job sites
- Supply chain interruptions
- Escalation/unit price provisions related to labor and materials
- Delays/extension of time
- New job site safety costs
It is important that you educate the team to be aware of unexpected costs. Everyone on the team should be tracking their time and costs, and communicating to their supervisor the impacts current conditions are having on contract performance. This will help you to quantify additional costs timely and give you greater leverage and support as you try to recover them. If you don't identify these additional costs timely, it is very difficult – if not impossible – to accurately determine them and support a change order.
Communication is key in the change order process. Communicating with all parties involved on the project including the owner, contractor, and subcontractors is vital, as is knowing the responsible individual at each of the contracted parties and how items should be communicated. It is important to discuss why there are changes and how they will be managed.
When returning to job sites that were shut down due to COVID-19, it is extremely important to provide written notices to the owner or general contractor of all schedule impacts and additional costs to be incurred. It is also important to let the owner or general contractor know that delays or future delays cannot be quantified, and that costs cannot be fully predicted given that COVID-19 is still in effect.
The general contractor should review with subcontractors and adjust all subcontractor schedules accordingly. The contractor should make sure the owner is in agreement on the timing of the new work or change in work.
The key is to be in compliance with the communication requirements within the contract and to avoid surprises.
This step can be very tricky because it involves the party responsible for paying for the change order, pricing for the change order, and extension of time for the entire contract. With COVID-19, many contractors and contract owners are left wondering which party is responsible for additional costs. Many times the answer can be found in the contract language, but interpretations between the parties can be different. Typically, the contract determines how the pricing of the change order will be handled either through unit pricing, time and materials pricing, or as a lump sum cost. Even if this is specified in the contract, both parties need to come to a mutual understanding.
Maintaining documentation of the ongoing communications between the contracted parties and the support of the additional cost is important. Without this information, it will be difficult to recover any of the additional costs either through change orders or claims. In addition, any approved change orders should be in writing and maintained as part of the contract agreement. We recommend that as the contractor signs normal change orders or COVID-19 related change orders, they include language that the contractor does not waive and/or reserves all claims for additional compensation and time for the continued increase in the scope of work performed while impacted by inefficiencies due to COVID-19. The contractor should discuss with their attorney and use language that is detailed enough that a third party will understand that the contractor is not waiving their rights to extra time or billing relating to the ongoing impacts of COVID-19.
The current environment is challenging for all businesses, and contractors should not have to cover all of the additional costs required to complete projects. Hopefully, your contract clauses allow you to recoup some of these costs. In order to be more successful in recovering these costs, you need to understand your rights, quantify and track the extras, communicate throughout the process, document the situation and the ongoing correspondence, and get written approval for any agreed upon change.
If you have any questions about these or any other matters, please do not hesitate to contact your Kreischer Miller professional or any member of our team. We are also regularly updating our COVID-19 Resource Center, which you can access here.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.