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On Behalf of | Mar 26, 2020 | Firm News

Written by Adam Cook

The tourist-dependent city of Las Vegas was effectively shut down on March 17, 2020, when Nevada Governor Steve Sisolak halted all “nonessential businesses” due to the spread of Novel Coronavirus COVID-19.  The edict was of particular concern to the contractors working on the new Allegiant Stadium, a $1.8 billion NFL stadium due to open in July 2020.  Fortunately, two days later the contractors were informed that construction would not be placed on hold.

Other contractors have not been so lucky.  COVID-19 shut down construction projects in every state, sometimes without even giving builders a chance to demobilize from the jobsite.  In most cases, there is no telling when the delay will end and work will resume.  While outdoor projects like horizontal construction might be able to continue, interior construction and remodeling ground to a halt.

The situation has left contractors and owners scrambling to revisit their original contract.  Many of them will find an “excusable delay” provision.  It excuses the contractor from the performance completion date established by the contract if the work is hindered by a delay that is not the fault of the contractor.  A good example of an excusable delay provision is the one used in federal construction contracts, found at FAR 52.249-14.  It specifically names an “epidemic” as a source of excusable delay.  In contract law, an epidemic is often considered a force majeure event—something no contractor or owner has control over.  And while it may be comforting to assume that the delay in work is nobody’s fault, excusable delay can be a minefield for contractors and owners alike.

Defining the Delay

A prime contractor faced with a total work stoppage due to an epidemic such as COVID-19 has a lot of things to worry about.  The most obvious one is whether the delay is going to jeopardize the completion date.  For a contractor with a fixed date of completion, the only way to extend the completion date is a written change order.  But how long should that date be extended?  The American experience with COVID-19 is that there is no way of estimating with any accuracy when new restrictions on normal business operations will change.  In the meantime, the prime contractor has subcontractors and suppliers standing by.  Each one will want delay damages in the form of standby costs and daily overhead.  These parties will make their demands regardless of whether the prime contractor can recover such delay damages for itself.

In order to demonstrate an excusable delay, the contractor has to prove that the delay is both (1) beyond the control of the contractor and (2) unforeseeable.  In the case of a work stoppage due to COVID-19, the first element should be easy.  No contractor has any control over a global epidemic.  But proving the epidemic unforeseeable might be difficult.  If the contractor agreed to perform after having knowledge of a potential work stoppage due to COVID-19, the owner might argue that the delay was perfectly foreseeable.  For example, in Matter of AFV Enterprises, PSCNA No. 2691, 01-1 B.C.A. ¶ 31388 (Apr. 11, 2001), the Postal Service Board of Contract Appeals determined that a particularly rigorous review by a town planning board did not create “excusable delay,” because the contractor should have been able to foresee the challenge it faced ahead of time.  Considering the massive and widespread media attention given to the COVID-19 Epidemic, an owner may conclude that a contractor should have known the risk of a stoppage, depending on when the contractor first agreed to perform.

Impact on the Bottom Line

If a contractor can demonstrate that the COVID-19 Epidemic is an excusable delay using the two-prong test above, it will be entitled to an extension of the work schedule and be able to claim any associated losses.  Perhaps more critically, the contractor will also be able to avoid potential liquidated damages or the loss of retained funds held by the owner.

But it is important to remember that an excusable delay is not always the same thing as a compensable delay.  A compensable delay is a delay that entitles the contractor to reimbursement for damages sustained on account of the delay, such as maintaining an on-site workforce or a job trailer but not being able to use them.  Compensable delay occurs when the contractor requests suspension or termination of the work, or a re-sequencing of the work to mitigate damages, and the owner refuses.  For example, if an owner insisted that a contractor maintain a presence on the jobsite during a shutdown caused by COVID-19, the contractor could demand the associated costs.  Forcing a contractor to stand around for an indefinite period of time is often unreasonable.

Not all delays are the same.  Bad weather can be expected to pass.  An epidemic is a much more uncertain affair.  When an excusable delay is indefinite, such as the case with COVID-19, the most practical resolution is the immediate termination of all contracts.  The contractor and owner can negotiate a termination for convenience, reimbursing the contractor for all work performed up until the date of termination, and for the costs associated with termination such as demobilization.  Importantly, the contractor usually cannot demand profits on work not yet performed.

Sovereign Acts

Returning to the Federal Acquisition Regulations, the force majeure clause at FAR 52.249-14 also includes “acts of the Government in either its sovereign or contractual capacity” as a basis for excusable delay.  In March 2020, governments worldwide “locked down” their citizenry, halting construction projects under penalty of law.  Federal contractors will have little difficulty arguing that their work was delayed or halted due to a sovereign act.

But “sovereign acts” is a two-edged sword.  The Sovereign Acts Doctrine is a longstanding defense that the federal government has used to excuse actions that impede prosecution of work.  It is rooted in the fact that the government is both a sovereign and a customer.  When the government is acting in its “sovereign capacity” rather than in its capacity as a customer, the resulting delay to the contractor may not be excusable.  On the other hand, if government action is targeted at a specific contractor or a specific project, the government is acting as a customer, and cannot raise the Sovereign Act Doctrine to defend itself from a resulting claim.

For example, in Appeal of Garco Construction, Inc., ASBCA No. 57796 (Sept. 22, 2015), the Armed Services Board of Contract Appeals considered a contractor whose subcontractor could not deploy its typical labor force to an air force base because of a preexisting policy barring pre-release convicts from working on the base.  The contractor argued that the policy had never been implemented in the past, and the subcontractor was unfairly targeted.  The Board concluded that there was a policy in place prior to performance, and that the policy was implemented by individuals at a lower level than the contracting officer.  Because the policy was therefore a security measure and not a contracting decision, the Sovereign Acts Doctrine barred a claim against the government for the costs resulting from implementation of the policy.

The Sovereign Acts Doctrine plays an obvious role in shutdowns caused by the COVID-19 Epidemic.  When all “nonessential businesses” are shut down, a contractor cannot claim that it is being unfairly singled-out.  There is a causation problem here—what or who is responsible for the shutdown?  The answer might be that the shutdown is “directed at the contractor” because it is within the power of the government to define “nonessential business” and make exemptions where it chooses. In the case of COVID-19, even where the government claims that its actions are justified or for the sake of the public good, it cannot claim that it subjected the contractor to a rigid policy that preexisted the delay in performance.  The future will tell whether the Sovereign Acts Doctrine is invoked and, more importantly, whether it is successful.