On traditional design/bid/build projects, design professionals are not party to the contract between the project owner and the contractor. However, contractual issues that may arise in the construction contract may also affect the design professional. Where appropriate, the design professional can suggest to the owner appropriate changes that may minimize the risk of a design professional becoming a party to a claim.

The point of contracts is to create certainty, in an effort to avoid litigated or arbitrated disputes. Still, the various parties in the construction process may have different risk tolerances. For example, general contractors are often characterized as “risk tolerant.” That risk, though, is usually calculated by the contractor internally, outside the terms of the written contract, based on an assumption that the contractor can get the work done more cheaply and more quickly than the owner anticipated. Project owners typically want and expect close-to-absolute certitude – absolutely as to cost – in their construction contracts. The standard fixed-price or lump-sum construction contract is geared toward protecting that interest.

Post-COVID-19, however, the discussion in the industry suggests that “all bets are off” when pricing and agreeing to construction work. Labor and materials shortages have sent owners and their design consultants backpedaling when general contractors pursuing a fixed-price contract seek contractual concessions that are meant to “un-fix” the price.

Despite these new uncertainties, standard form construction contracts historically have not taken into account price escalations for labor and materials, or even safety measures. Standard force majeure clauses – sought to be invoked by contractors in COVID-19-era contracts – typically don’t meet the contractor’s need. For example, the closest thing to a force majeure clause in the AIA general conditions (A201-2017) is at section 8.3.1 of that document, which speaks principally in terms of “delay” – and then only limited types of delay, such as labor disputes and “unusual delays in delivery” (although also including “other causes beyond the Contractor’s control”).

If, nonetheless, a contractor requires a cost-escalation clause, it is vital that the clause be reasonably tailored so that the contractor does not lose its incentive to make a strong effort to obtain the original product or labor at the original price. Although best practices on post-COVID-19 escalation clauses are still developing, useful inclusions (from an owner’s perspective) in such a clause are:

    • Setting a percentage or other appropriate threshold under which the escalation clause is not triggered.
    • A requirement for the contractor to provide in advance of the execution of the contract an enumeration of materials or labor which the contractor believes may escalate, setting forth estimated costs at the time of entering the agreement (this should be attached as an exhibit to the contract).
    • A requirement for the contractor to provide evidence of the steps undertaken to avoid the cost escalation (including the right of the owner to inspect the books and records of the contractor).
    • An opportunity for the owner to value engineer around the escalation items.
    • An elimination of profit or markup to the contractor for the increased cost items.
    • A requirement that the escalation proceed through the ordinary change order process (for orderliness, and to ensure that no additional claims are forthcoming once the escalation is agreed upon).

From the point of view of the owner, utilization of “allowances” (suggested by some contractors) to account for price escalation should be avoided, as construction allowances create owner uncertainty, and typically lack the mechanisms to ensure that the contractor does its level best to keep prices in line with the original agreement.

Adding more detail to the construction contract to address other potentially claimable cost items related to COVID-19 safety should be considered, for example, in regard to:

    • The cost of personal protective equipment and washing stations.
    • Costs associated with the inability of a contractor to share equipment because of health concerns/social distancing.
    • The cost of project health screening.

The foregoing doesn’t even touch the issue of delay facing your client – the owner – for example, because of sheer work backlog for contractors. That supply and demand issue will no doubt drive negotiations on many of the items above. However, as always, even if “you can’t always get what you want,” the only way you’re going to “get what you need” is if you know what you are getting.