By: Lane F. Kelman and Robert S. Turchick
The coronavirus pandemic has created novel burdens for contractors throughout the world. Project stoppages, limited work exemptions, and mandatory restrictions will continue to impact construction and related industries well into the future. Due to the severity of the coronavirus pandemic’s economic disruptions and impacts, companies should take steps to better position themselves to recoup the additional costs and time.
In our previous guide for navigating the current crisis, we discussed how the pandemic’s impacts could entitle contractors and subcontractors to compensation, additional time, or both. To successfully recover costs or obtain additional time, the planning and documentation must start now by setting up an in-house cost-tracking and accounting system that isolates the coronavirus-related impacts and associated costs. Furthermore, submitting certain insurance claims now should best position yourself for a potential recovery from insurance carriers. In addition to this long-term planning, contractors are strongly encouraged to take advantage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which could provide the financial support that qualified businesses need to stay afloat during these difficult and unprecedented times.
Cost Tracking and Accounting
Keeping track of costs and delays can be a daunting task even during normal times, and the pandemic has rapidly created new and harsh financial burdens in the construction industry. While coronavirus-related delays will constitute “claims” under most construction contracts, the unfortunate reality is that whoever you seek to recover these costs from in the future—owners, contractors, or insurers—will challenge your claim to limit their own exposure. Contractors should implement plans now to isolate costs related to COVID-19 to make recovery more manageable down the road.
The first step in tracking these costs is to create a job cost code for projects and tasks affected by COVID-19. Use this code to keep track of the added costs for:
- Increased material costs resulting from production delays and supply chain disruptions
- Additional management time related to dealing with the effects of COVID-19
- Delay costs, such as extended general conditions or acceleration costs
- Idle time caused by the coronavirus or mandatory business restrictions
- Paid sick time
- Doctor appointments and hospital visits
- Coronavirus testing time
- Cleaning supplies
- Facility cleaning
- Personal Protective Equipment (PPE)
- Extra machinery required to comply with guidelines from the CDC and OSHA
- Salaries for idle employees
- Rent for idle offices and warehouses
- Health insurance for furloughed employees
More examples and tips can be found here. Remember that any person or company making a claim for damages or extra time has a legal obligation to mitigate or minimize their losses. So, in addition to tracking costs, contractors should create detailed narratives that explain why they made their cost containment and schedule mitigation decisions. These narratives will help show that the steps a contractor took minimized losses and were reasonable under the circumstances. Finally, schedule impact damages can be difficult to track, and establishing the right to recover them requires identifying the delays and tying them to specific added costs.
Every project is different and will warrant a tailored approach to tracking added costs and schedule impacts. Regardless of the unique issues faced at each individual job, getting organized now and planning how to prove your entitlement to damages or added time will maximize your cost recovery and secure time extensions in the future. For more help with internal cost tracking and accounting, refer to this helpful resource package.
Business Interruption Coverage
Lawsuits have been filed throughout the country by businesses seeking insurance coverage for the disruption caused by COVID-19. “Business interruption coverage” is typically provided through an endorsement added to property insurance policies if specifically purchased by the policyholder. These policies provide coverage for “physical loss of or damage to” property. To make a successful claim for coverage under a business interruption endorsement, businesses would need to show that coronavirus physically infected their property and caused damage by staying on surfaces or objects—not an easy feat. This task would be made even more difficult by exclusions that disclaim coverage for any losses resulting from viruses, which are common.
As explained more fully in a post by Cohen Seglias’ Insurance Coverage & Risk Management Group, any company that has business interruption coverage and is hurting right now should (1) ask its insurance broker to put its carrier on notice of a potential coronavirus-related claim and then (2) actually submit that claim. While the claim will most likely be denied at the outset, submitting it will position the company to bring a lawsuit against the insurance carrier for damages in the future. Hopefully, between now and then, other lawsuits over business interruption endorsements that are currently pending will provide a framework for creative and successful legal arguments that will unlock the doors for coverage and recovery of money lost due to coronavirus.
The CARES Act
The pandemic’s hit to the economy has been staggering. The recently-passed CARES Act could provide the financial support necessary to help get your company through this crisis. Through a provision in the CARES Act called the Payment Protection Program, the Small Business Administration has been authorized to provide loans to businesses with less than 500 employees without requiring any collateral or personal guarantees. The authorized loans will be worth the lesser of 2.5 times payroll or $10 million, and they can be used broadly so long as the money is spent prior to June 30, 2020. Even better, the loans can be forgiven for companies that maintain employees or quickly rehire them and use the funds to cover the costs of:
- Payroll costs
- Mortgage interest
It is recommended that eligible businesses apply as soon as possible as there is a cap on funding, and the number of applications is expected to be high. More information regarding what businesses qualify for these loans and how they can be used in order to qualify for forgiveness can be found here.
With the CDC’s extension of the “social distancing” guidelines until April 30, it seems likely that most construction activities will remain somewhat restricted for at least another month. What remains to be seen is how far into the future the effects of the pandemic will be felt. The importance of documenting COVID-19’s impacts now cannot be stressed enough. Cohen Seglias’ Construction Group is available to discuss any questions you might have about steps you should be taking to weather the pandemic in the short term and set your company up to recover lost money and time in the future.