COVID-19 contract risk: How can contractors protect their interests?

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Ontario Construction News staff writer

Communication, contract language and risk analysis/planning are vital for contractors seeking to avoid COVID-19 business pitfalls in navigating contracts, bonding and risk relationships in the post-pandemic era.

Lawyers from McMillan LLP and insurance/bonding representatives from Marsh outlined some business-preservation strategies and ideas last Wednesday at a panel discussion co-ordinated by the Ontario General Contractors Association (OGCA) executive director Giovanni Cautillo.

Contractors are familiar with force majeure provisions put in play by COVID-19, said McMillan LLP construction lawyer Jason Annibale. These are helpful for contractors in overcoming the risk of delay-of-project claims.  Annibale says it is important to note that force majeure represents a shared risk provision; contractors may still be on the hook for additional project costs even though they won’t be penalized for being late in completing their work.

However, rather than relying on force majeure, contractors may be able to apply could be a better provisions that would compensate contractors for additional costs when there is a “change in law,” Annibale said.

This provision, (Sect. 10.2.7 in the CCDC contract) allows contractors to submit change orders for the additional costs that they encounter. Annibale indicated the provision could be helpful when  the government imposes new regulations and rules that require delays or work stoppages.

He also noted that contractors should assess the causes of delay.  If, for example, owners order a halt to their project, then the additional costs would usually be their responsibility.  Similarly, there would be cost recovery provisions if the government orders the shutdown, because of the “change of law” provisions.

The final reason for delay –  caused by the contractor – raises the most serious and challenging issues, including the potential for liquidated damages.

But Annibale suggested that most contractors should find some relief through the force majeure, change of law or owner-responsibility aspects of COVID-19 delays and added costs.

He made note that contractors should be careful about notice requirements and ensure all notices of delay or potential delay are properly and promptly reported under the contract terms, or the contractors may lose the protections otherwise available to them.

Gary Rodrigues from Marsh Advisory observed that COVID-19 can be seen as one of many “stressors”  contractors experience routinely in their businesses.  He said the “best contractors bet on themselves to control their own destiny.”

Contractors deal with issues such as extreme weather, new technologies, and the constant challenges of risk transfer.

“And so my suggestion with COVID is not to look at it like its suddenly this big boulder in the middle of the road, (but) that it is a fork in the road and we have to make decisions,” he said. “We just have to begin to manage its impacts in ways that we were already managing the stressors” through increased awareness and implementation of safety protocols.

“If I could give you one takeaway piece of advice, (it) is to really work with your attorneys and brokers to study your contracts and know what you have in terms of your obligations, protections and potential reimbursements,” he said.

Steven Gava from Marsh Canada Ltd. said communication is important, especially with sureties.

It is better to be up front about potential issues and challenges, than to try to hide problems, he indicated, while acknowledging that the necessary discussions and disclosures could turn surety providers from friends to “frenemies” as they grow concerned about their circumstances.

“Managing cash flow and liquidity coming out of COVID may be a challenge for contractors, and I know its already been mentioned by my pother panelists, but don’t be hesitant to be transparent and increase your communication and co-ordination with your creditors,” he said. “Its only going to benefit you in the long run.”

Contractors also need to be on top of their numbers, including their key financial ratios, and take measures to manage their working capital “by ramping up collections” by educating project managers and creating internal controls. As well, it is important that business owners constantly watch their costs, making sure their administrative overhead, supply chain and other matters are under control.

It is important to work with your accountant, broker and your surety to “properly install proper internal financial reporting, such as a correct ‘work on hand’ report” and that you can communicate your backlog and anticipated margins, he said.

Gava also suggested that contractors “instil some form of subtrade risk management strategy.”

Annibale, in response to a question, indicated it could be helpful for contractors to develop or include new contract language to specifically address pandemic or epidemic risks.

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