COVID-19 Could Impact Contractor Performance Bonds
Editor’s note: This article was originally published on March 16, 2020 and is based on information available at that time.
As COVID-19 continues to expand around the United States and the world, it may only be a matter of time before U.S. construction projects are affected by the virus. Performance bonds guarantee that a project will be completed by a contractor according to the contract. However, what if a contractor cannot complete a project on time due to widespread disease? What, if any, impact could the virus have on a contractor’s surety bond program?
Several risks associated with the virus could trigger a performance bond claim.
- Materials: The Chinese account for a large supply of construction materials, including steel, copper, cabinetry, etc. An inability to obtain these materials could significantly delay or stop a project altogether. Even if a contractor is able to obtain them from other sources, it may be at a significantly higher cost than they put into the bid.
- Labor: There is already a shortage of qualified labor in the construction industry. Additionally, construction already lends itself to the spreading of viruses; workers are often in close proximity, handling common materials, and they may not have an easily accessible place to wash their hands. Furthermore, even though many now have paid sick leave, there is often pressure not to use it. These things could magnify the labor shortage and make it difficult to complete projects on time.
- Safety: The world is having a serious shortage of respirators. Because of widespread panic, many people have been purchasing N95 respirators—so much that the Surgeon General has asked people to stop buying them. It has created a shortage for people who really need them, like contractors. If contractors cannot get these safety masks, certain trades will either be unable to work or risk continuing the project without masks, which would endanger workers and open companies up to OSHA penalties.
All these things could cause project delays or the inability to complete a project. That is where a performance bond claim could come into play. It is important for contractors to consider these risks and mitigate them as much
Force majeure simply means, “superior force.” It is a contract clause that excuses a party’s performance based on uncontrollable events. Examples of such events include acts of terrorism, earthquakes, war, hurricanes, and government action. These clauses can also include items such as “disease.”
Fortunately for contractors, many construction contracts include a force majeure clause and even those that do not have some protection under common law. Unfortunately, courts tend to view force majeure provisions narrowly. In fact, causation must pass 3 tests:
- The event was unforeseeable.
- The event was unavoidable.
- The event was impossible to overcome.
While contractors with existing bonded contracts may be able to prove these 3 points, what about contracts signed after February 2020? Consider that, as of that point, the World Health Organization had told the world to prepare for a pandemic, U.S. lawmakers had approved funds to combat the virus, and California had declared a state of emergency. Given these circumstances, it may prove difficult for contractors and their bond companies to prove that the event was unforeseeable.
Prepare for the Worst
So, what should contractors do? First, seek the counsel of a good construction attorney. It may be advisable to include wording in new contracts regarding coronavirus-specific delays. Do not leave the contract up to force majeure or court interpretation. Include specific reasons for delay due to COVID-19 that both parties can agree to.
Further, have a plan for materials going to a jobsite. Do not assume that your suppliers can get the materials as usual. Make sure they verify the stock or the ability to quickly obtain suppliers.
Finally, communicate your risk management to your bond underwriter. Showing them that you are prepared will give them confidence in your ability to work through this uncertainty.
No matter what situation arises, it is best for contractors to be prepared and to negotiate favorable contract terms. Regardless of what happens with the current pandemic, construction disputes are expensive and time consuming, and could lead to a claim against your performance bond. A little bit of work up front will keep both your employees and your balance sheet healthy.