April 5, 2021

Risk Management 2.0 for construction companies

The novel coronavirus (COVID-19) pandemic has brought unprecedented challenges to the construction industry. We’ve seen site shutdowns under shelter-in-place mandates, project delays because of supply chain disruptions, increased safety precautions and, regrettably, sick personnel. As a result, construction companies have learned valuable lessons about risk management during the pandemic — call it “risk management 2.0.”

Contract provisions

As you likely know, a force majeure clause is a contract provision that excuses nonperformance or extends timelines when an unforeseeable event beyond the contractor’s control causes a delay. Whenever possible, specifically name infectious disease outbreaks, epidemics and pandemics under this clause, along with extreme weather events and other disasters typically named.

Two of the most widely used contract forms for construction in the United States — the American Institute of Architects (AIA) A201-2017 and ConsensusDocs 200 — don’t contain a force majeure clause. Instead, they have delay provisions listing occurrences in which a contractor may be entitled to a time extension and corresponding increase in the contract price. The ConsensusDocs 200 agreement lists epidemics as a justifiable delay.

When negotiating a contract, ask for a deposit to buy and store materials before the start of construction. Also, investigate whether the contract could include a price acceleration provision that allows you to adjust the price to reflect actual costs if market prices increase.

Last, construction contracts typically require contractors to give notice of any delays, changes and additional costs incurred — and to include specific, detailed information. Clarify with owners that, while you’ll make all reasonable efforts to do so, disasters involving infectious diseases are unpredictable and, in such situations, you’ll measure these delays and calculate the added costs at the time. (For any matters involving contracts, an attorney’s advice is helpful.)

Other steps

Beyond the contract, there are other steps you can take. For example, when bidding on a project, identify two or more alternate suppliers. Doing so will provide a contingency plan if your usual supply chain is disrupted.

To the extent necessary, “upskill” yourself and your employees’ ability to create detailed descriptions of project delays and to calculate the cost impact of slowdowns. Fine tune your daily logs and reports, time sheets, schedule updates, meeting minutes, and so forth.

Review insurance policies carefully; many may not cover outbreaks, epidemics or pandemics — and may even contain exclusions for them. If you’re not covered, evaluate the feasibility and cost of adding such coverage or investing in a new policy.

Above all, integrate outbreak preparedness measures into your overall safety program. Such measures would:

  • Promote ways of working that limit the spread of known infections,
  • Communicate health-related updates and warnings to employees, and
  • Facilitate decisions on whether to suspend or cancel a project because of infectious disease.

Establish protocols for project shutdowns that include cleaning and sanitizing sites and equipment, removing or locking down equipment and materials, and securing and monitoring the job site.

Anything else?

If the COVID-19 crisis has taught the construction business anything, it’s to prepare for the worst and hope for the best. Consult with your trusted legal and financial advisors to create a plan to mitigate the risk of disruptive illness — or anything else.

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