NY Contractor Relief Bill Is Much-Needed, But Imperfect

By: Michael F. McKenna, Kanwal S. Awan and Timothy R. Ryan

Traditionally, construction contractors factor into their bids some expectation that there could be minor increases in material prices after the contract is awarded. However, due to COVID-19 and subsequent supply chain issues, price increases and labor shortages have materially altered the landscape. Unexpectedly, material prices rose to historic levels. This left many contractors and subcontractors with project financials that were both unanticipated and unsustainable.

Then, when you dovetail these historic price increases with unprecedented supply chain issues and labor shortages, contractors and subcontractors had to operate in a construction climate very different from bid expectations.

Fortunately, New York state is providing public contractors with much-needed financial relief. S.B. 10109, once signed by the governor, will afford public contractors with equitable adjustments to their contracts for material price escalation exceeding 5%, provided their bid was submitted prior to April 2020.

Enacted on June 1, this bill is based on the systemic nature of the unanticipated breakdowns in the supply chain and historic escalation of material prices.

By amending applicable state and public benefit corporation construction contracts to provide contractors with equitable relief for material escalation, New York state is supporting public contractors with issues far outside their control. Specifically, the bill affects all New York state and public benefit corporation construction contracts that are predicated on bids submitted prior to April 1, 2020.

The emergent need for legislative action amending all applicable state and public benefit corporation construction contracts is great news for state contractors who have experienced substantial supply chain and materials issues through no fault of their own.

New York state is headed in the right direction by enacting this bill to deal with the ramifications of the COVID-19 pandemic on public contractors and subcontractors. This enactment recognizes the negative impacts of the COVID-19 pandemic, which are long-lasting and far from over.

The bill reflects the reality that these unanticipated circumstances are not the types of cost increases that are inherent in every construction contract nor the types of risks assumed by the contractor. These are costs that are, as stated in the bill, unforeseen, unanticipated and of an emergency nature that impose substantial inequity on the contractors.

Although this is the correct legislative step forward, contractors must keep in mind that this new law only affects contracts with bids submitted before April 1, 2020. Contracts based upon bids submitted after April 1, 2020, will not automatically amend, and the new law in its present form does not provide a basis for relief.

The choice of April 1, 2020, is somewhat arbitrary. The real unexpected condition was when the omicron variant hit, roughly from November 2021 through January 2022. Even then, the financial impacts of the omicron variant are still being felt, so the bill should simply be applied across the board.

The standard should be set at the time of the bid or handshake and if there is more than a 5% variation in pricing, it needs to be considered for purposes of compensation. To do otherwise is to ask contractors to build contingencies into their bids for things that may or may not happen.

Contingencies are not good. If the potential circumstances occur, then to a degree, no harm, no foul. But, if they do not, then the contractor winds up with an unexpected and undeserved windfall. Having contractors put contingencies into the bid while at the exact same time the owner is going to award the contract based on the lowest submitted bid is asking contractors to do things that are contrary and may make disputes more likely.

The lowest bid mandate requires no contingencies. Doesn’t it make more sense to look at the unexpected and determine the equities and make adjustments if the unexpected occurs?

Sometimes we need to go back to basics. For contracts to be successful, they need to work for all parties. When circumstances change, as they have here, the parties need to go back to the original time they entered into the proverbial handshake and think what would both parties have done at that time had they known of the unknown. In this situation, the answer is simple. The contractor would have put more money into its bid and the owner would have paid more.

As such, this bill is consistent with the basic contract concepts of the implied covenant of good faith and fair dealing and a contractor’s right to an equitable adjustment.

To do otherwise would put the state in the position of having contracted for a price based on one set of circumstances. Then, when those circumstances change, the state would be getting the benefit of more costly materials. The state would also receive the ultimate benefit, without recognition of the additional costs that were experienced by the contractor due to those changed circumstances.

For the contracts that qualify for automatic amendments, much-needed help is on the way. We are hopeful that this same concept of good faith and fair dealing will continue in New York and be recognized elsewhere as the issue is national and not local.