Labour shortages, supply chain issues, and contract defaults – The Perfect Storm

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In today’s construction climate, contractors should be reviewing contract wording more carefully than ever before.

By Greg Meinen, Director of Surety at Echelon Insurance

Greg Meinen
Greg Meinen

A lot of outlets have been reporting on the labour shortages and supply chain issues currently plaguing the construction industry. Based on these reports, there does not appear to be an end in sight nor a quick fix for these issues. Recent events including the global pandemic have without a doubt impacted on the construction and surety industries.

In today’s current construction climate, if a dispute arises over increased costs or a delay in schedule due to supply chain issues, who is the responsible party? The answer isn’t as black and white as it used to be. Some industry professionals argue that the global COVID-19 pandemic falls under the force majeure clause, but it’s not that simple.

Ultimately, the end result is determined by the contract wording and the dispute mechanisms within it. A bond can only respond if there is a default in the contract, making it critical for contractors to pay close attention to the clauses addressing delay claims, liquidated damages, notice clauses, indemnity clauses, force majeure clauses, and termination clauses.

How are the delay claim provisions set out in a contract?

When submitting a delay claim, the contractor must be very specific. Simply citing the COVID-19 pandemic as the cause of the delay will not be sufficient.

For example, one prevalent cause for recent delays is a shortage in labour. The overall increase in construction demand throughout the duration of the pandemic has added to the shortage in available, qualified, and properly trained trade professionals. These shortages are coupled with supply chain disruptions, rising prices due to inflation, and material delays caused by manufacturing slowdowns or transportation and logistical issues.

When reviewing the delay claim provisions within a contract, the contractor must also review any remedies that are noted. They should be trying to determine at whether the remedies allow for delay claims at all, if the provisions are specifically for an extension of time only, and if they allow for compensation in any way.

Dig into the details

Liquidated damage clauses are often straight forward, but that doesn’t mean you shouldn’t pay close attention to how they are worded. The contractor should look at the schedule and ensure it is reasonable, especially in today’s construction climate. It’s also important to take into account whether or not the damages an owner can charge are reasonable in the event of a shift in schedule.

Notice clauses surrounding change orders and contract extensions need to be reviewed carefully as well. Pay close attention to how strict the timelines are for these clauses. The contractor needs to ensure they understand and make note of the timing requirements for notice of change orders, delays, and extensions. A date missed can lead to a loss of rights under the contract to negotiate, leading to the contractor carrying the liability.

Force Majeure is a hot topic in today’s construction environment, but in the majority of contracts, this clause does not speak to pandemics. It may have language that allows a contractor to receive additional time, but not compensation. It’s important to keep an eye on this clause, as it may evolve over time in response to the current climate.

The last clause to pay very close attention to is the termination clause. It’s crucial to ensure there are no clauses that allow for trivial breaches and terminations resulting from said breach. The contractor should look at the cure provisions and ensure they are fair and equitable.

Communicate and collaborate for the best result

Even if a contract has all the right clauses and language that is fair and equitable, disputes can still arise. It’s important for the contractor to follow the contract exactly, and give proper notices to the owner whenever necessary. The contractor must also communicate with the owner in real time on any issues that arise throughout the course of a project. Owners recognize there are labour shortages and supply chain issues. They are invested in the finished product and delays cost both parties. The sooner a contractor communicates an issue, the sooner it can be resolved. Do not be afraid to ask for advice from your surety broker or provider. They have the expertise, experience, and knowledge to help you complete your project, and when needed, can support a collaborative discussion across involved parties to get projects back on track.

This article is for general information purposes only from the perspective of a surety bond provider and is not intended to be legal or other professional advice.

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