Impact of Covid-19 on Construction Contracts in California—a Guide to Project Shutdown and Restart

• Publication year: 2021
• Author: Kelly C. Smith, Lisa Jones, Kelly Martin Wilson, and Bryan Payne

Impact of COVID-19 on Construction Contracts in California—A Guide to Project Shutdown and Restart

Kelly C. Smith, Lisa Jones, Kelly Martin Wilson, and Bryan Payne

Kelly Smith is an associate at Snell & Wilmer. She concentrates her practice in commercial litigation, representing a variety of clients in both state and federal court. She focuses her practice on matters involving construction disputes, breaches of contract, real estate disputes, and business torts.

Lisa Jones is a Senior Claims Analyst at Arcadis. Lisa contributes over 20 years of experience in construction specializing in contracts management.

Kelly Martin Wilson is a Senior Claims Analyst at Arcadis. He has more than 40 years of international experience in engineering, construction, and infrastructure projects.

Bryan Payne is a Principal Claims Analyst at Arcadis with nearly 30 years of experience in public construction. He is a California licensed civil engineer, construction attorney, and expert in public procurement and government contracts.

I. INTRODUCTION

Although California has entered its second COVID-19 shutdown, construction projects throughout the state continue to experience effects of the original shutdown. Those effects have yet to be fully determined and may not be fully appreciated for some time. After all, the construction industry is interconnected with multiple sectors of the economy, like labor, material sourcing, and real property development, where complete effects of the pandemic are still unknown. Still, the industry has been surprisingly resilient. While the construction sector slowed nationwide from January through June 2020, it experienced measurable growth during the summer.¹ This positive trend, however, is not a cure-all, especially for those contractors, project owners, and construction workers who have already experienced project shutdowns.

This article provides a summary of the contractual effects of the project shutdowns and guidance for restart and completion. In particular, the article examines impacts of and potential remedies related to the following three time periods:

1. the pre-COVID-19 period (leading up to the March 2020 shutdowns);
2. the COVID-19 shutdown period (March to May 2020); and
3. the post-shutdown period (May 2020 leading into the second shutdown through the "Regional Stay At Home Order" beginning December 3, 2020).²

II. GOVERNMENT-MANDATED SHUTDOWN ORDERS

Restrictions enacted to curb COVID-19 significantly delayed and disrupted the orderly progress of construction work. COVID-19 outbreaks resulted in the following government actions and restrictions:

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• March 4, 2020: State of emergency declared in California.³
• March 12, 2020: Mass gatherings (over 250 people) and social gatherings (over ten people) banned.⁴
• March 19, 2020: California statewide stay-at-home order issued.⁵
• April 1, 2020: Closure of all public and private schools (K-14 and institutions of higher education) ordered for the remainder of the 2019-2020 academic year.⁶
• May 4, 2020: Statewide stay-at-home order modified⁷ to include a four-stage framework, which allowed for conditional reopening.
• August 28, 2020: California released the "Blueprint for a Safer Economy" to permit gradual reopening of certain business activities.⁸
• November 21, 2020: Californians in counties in purple tier, meaning widespread infections, were directed to stop non-essential activities between 1 PM and 5 AM.⁹
• December 3, 2020: Regional stay-at-home order issued.¹⁰
• December 6, 2020: Supplemental regional stay-at-home order issued.¹¹

On March 19, 2020, the U.S. Cybersecurity and Infrastructure Security Agency (CISA), under the oversight of the U.S. Department of Homeland Security, published an "Advisory Memorandum On Ensuring Essential Critical Infrastructure Workers Ability To Work During The COVID-19 Response."¹² On April 28, 2020, California's State Public Health Officer (SPHO) issued similar guidance, entitled "Essential Workforce," to augment Governor Newsom's stay-at-home order:

On March 19, 2020, Governor Newsom issued Executive Order N-33-20 directing all residents immediately to heed current State public health directives to stay home, except as needed to maintain continuity of operations of essential critical infrastructure sectors and additional sectors as the State Public Health Officer may designate as critical to protect health and well-being of all Californians.
In accordance with this order, the State Public Health Officer has designated the following list of Essential Critical Infrastructure Workers to help state, local, tribal, and industry partners as they work to protect communities, while ensuring continuity of functions critical to public health and safety, as well as economic and national security.¹³

SPHO's "Essential Workforce" broadly mirrors the CISA guidance. While neither the CISA nor SPHO guidance designates construction as an essential sector of the national or state economies, both designate construction workers supporting critical infrastructure projects as essential:

Construction Workers who support the construction, operation, inspection, and maintenance of construction sites and construction projects (including housing, commercial, and mixed-use construction); and workers who support the supply chain of building materials from production through application/installation, including cabinetry, fixtures, doors, cement, hardware, plumbing, electrical, heating/cooling, refrigeration, appliances, paint/coatings, and employees who provide services that enable repair materials and equipment for essential functions.¹⁴

SPHO's "Essential Workforce" also designates workers in construction-related trades, including warehouse and building material supplier workers, as essential.¹⁵

However broad the designation of construction workers as essential, the question remained—what constituted an essential project? Many public agencies could designate which of their projects were "essential" versus "non-essential" for purposes of complying with Governor Newsom's stay-at-home order and additional guidance.¹⁶ Others lacked that ability.¹⁷ Private sector construction that fell outside the essential category and public projects designated non-essential were subject to shutdown.

The shutdown orders directly affected construction contracts and had ripple effects on the construction economy as materials production and distribution slowed. Thus, both the direct and indirect effects of the shutdown have prevented contractors from completing work by the intended project completion dates and continue to threaten their ability to do so. In general, these delays were not caused by or attributable to the contractor or the project owner. Accordingly, depending on the express terms of the contract¹⁸ and governing law,¹⁹ a contractor may be entitled to an extension of time. In some circumstances, contractors may be entitled to additional time and compensation. This is particularly true where project owners had discretion to determine which of their projects were essential or non-essential and will be discussed further in Section IV, below.

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III. THE PRE-SHUTDOWN PERIOD (BEFORE MARCH 19, 2020)

Many projects were encountering delays before the shutdown began on March 19, 2020. Pre-COVID-19 delays should be segregated from those the pandemic caused when parties are considering requests for additional time or monetary compensation on projects that a COVID-19 project shutdown also impacted.

An accurate project schedule (both as-built and forecast) is critical to determining the pandemic's impact on delay. Accordingly, the parties need to know the exact status of the work constructed and the project's schedule when the shutdown occurred. This includes a realistic forecast of how much longer the work was projected to take when the shutdown began. These data points should enable the owner and contractor to segregate pre-COVID-19 issues from schedule impacts that the COVID-19 shutdown caused.

If delays existed before the shutdown that the schedule did not address, those delays should be accounted for. To determine the shutdown's effect, the parties also need to determine how and when work resumed, or when it will resume. Has work resumed? If so, was it resumed entirely or in phases? Or will the project be shutdown beyond the pandemic "all clear?" These questions are discussed further in Section V.A, below.

Various methods of delay analysis can be used to model project delay. Choosing the proper methodology requires consideration of factors, including:

• Contract requirements;
• Complexity of the project;
• Project status;
• Available records and their reliability; and
• Circumstances of the delay events.

Two main methods of delay analysis are as follows:

1. Prospective Analysis: Impacted As-Planned (IAP), or Time Impact Analysis (TIA), is a prospective method of delay analysis used when the project is ongoing. Accordingly, a prospective analysis demonstrates the likely impact of a delay or delays on the future project completion date.²⁰
2. Retrospective Analysis: As-Planned v. As-Built, or a "windows" analysis, is a retrospective method of delay analysis used when the project is complete or near completion. As part of this analysis, as-built dates are ascertained typically by interviewing site staff and reviewing progress reports, site diaries, progress photographs, and other records. The as-built dates are then compared with the baseline program to see where critical delays occurred and to assess the extent of those delays.²¹

Parties should check applicable contract provisions before determining which delay analysis methodology to use. If the project is in progress, however, and COVID-19 continues to impact and impede progress, a prospective analysis will likely be the better approach to ascertain the likely delay on remaining activities and project completion forecast dates.

IV. THE SHUTDOWN PERIOD (MARCH 19 TO MAY 2020)

A. Is It Force Majeure or Owner Shutdown?

Governor...