Tracking and logging COVID-19 expenses

April 10, 2020

Time is crucial in every construction project. Delay costs, liquidated damages, back charges, and additional labor hours for slow and untimely completion can ruin profit margins and lead to serious problems down the road. COVID-19, if it hasn’t already, will inevitably create costs and delays, none of which could have been negotiated or realized when an original construction contract was formed. Examples of these costs and delays include:

Government mandated shutdown of jobsites
Worker unavailability
Costs for extra personal protection equipment
Health inspection fees
Material expense increases for supply chain disruption and delays in production
Increased equipment requirements to keep workers busy but apart from each other
Technology costs to provide remote meeting capabilities for management, owners, architects, and contractors
Labor expenses after jobsite shutdowns
Delays and increased inspection costs

Understanding the rights and responsibilities in a construction contract is vitally important for successfully recovering these costs and delays. For example, many construction contracts contain force majeure clauses that provide time extensions to contractors for “acts of god” or for “other causes beyond the contractor’s control” but often require timely notices and ongoing reporting and due diligence. Further, change orders can provide a means of recovering losses but regularly the contract requires the costs and delays be contemporaneously identified and quantifiable. Regardless of the tool used to mitigate losses, consistent and contemporaneous tracking and detailing is key.

Here are three techniques contractors can use to track their COVID-19 related costs and delays: (1) create a new general ledger account or job; (2) create new costs codes for tracking COVID-19 related costs on a per job basis; and (3) encourage superintendents and those familiar with the jobsite to keep notes regarding additional, new restrictions implemented to slow the pandemic’s spread.

When creating cost codes for COVID-19, it is also important to break the code out to specifically identify the labor and material attached to the code. By removing ambiguities, the contractor preserves its claim, eases its later burden when proving its delays, and takes away an easy and available argument for would-be challengers.

By implementing a system(s) for tracking the inevitable delays now, contractors put themselves in the best position to recover later. If you need help understanding the forms of recovery, the implications in a contract, or have any other questions related to COVID-19’s effect on the construction industry, contact us so we can help you continue business.

Liquidated damages are unenforceable if they significantly exceed actual damages

March 27, 2020

The Texas Supreme Court recently clarified the law governing enforcement of liquidated-damage provisions in contracts. Even if the liquidated-damage provision was enforceable at the time the parties formed the contract, a court still may compare the actual damages suffered to the liquidated damages to determine whether the provision should still be enforced.

A liquidated-damage provision in a contract sets a fixed amount or formula to be used to calculate damages from a breach. If it is enforced, then the party enforcing the contract will not be required to prove its actual damages from the other party’s breach.

To enforce a liquidated-damage provision, the party enforcing the contract must prove that, at the time the contract was formed: (1) the harm anticipated from a breach was difficult to predict; and (2) the liquidated damage amount was a reasonable estimate of the harm.

The Court explained that a liquidated-damage provision might still be unenforceable even if these two elements are proven. The party breaching the contract may show that the liquidated damages were significantly higher than the actual damages caused by the breach. If so, the liquidated-damage provision constitutes a punishment or penalty, and therefore is unenforceable. In that instance, the party enforcing the contract may recover only its actual damages.

In construction contracts between owners and contractors, liquidated-damage provisions are often used to address damages caused by delays to completion of the project. Applying the Court’s reasoning to these contracts, the owner must show that at the time the contract was signed, it was difficult to estimate the damage that would be caused by a delay. The owner also must provide evidence to show that the amount or formula used for the liquidated damages was a reasonable estimate of the damages. If the owner makes these showings, the contractor would bear the burden to show that the owner’s actual damages resulting from the delays were significantly less than the liquidated damages in order to avoid enforcement of the provision.