Financial impacts of the COVID-19 crisis on the construction industry
In the midst of the current coronavirus crisis, the priorities of most construction companies are (1) the health and well-being of its employees, and (2) addressing delays on projects caused by the inability to operate. obtain labor or materials.
Once the crisis has passed, and it will be the case, the priority of construction companies will be to deal with the financial fallout from the crisis. Our economy, and the construction industry in particular, depends on people who venture out, people who interact, who move things and who engage in millions of transactions every day that force us to interact. In order to slow or stop the spread of the virus, we are, either by choice, by government dictate, or a combination of the two, entered a form of soft quarantine, severely restricted travel and strongly discouraged interactions and gatherings. personal. . Thus, the “cure” for the Coronavirus ceases or severely reduces the activities that drive our economy. A recession is already taken for granted. The question that remains is how bad it will be.
Fortunately, the specific problems resulting from the sharp slowdown in our economy are not without precedent. In 2008, the financial crisis and the Great Recession created many of the same problems that are likely to occur after the coronavirus crisis is over.
What to expect
Many parties on the paying side of a construction contract (for example, homeowners responsible for paying general contractors and general contractors responsible for paying subcontractors) will attempt to manage claims in a way that pays off. Put simply and bluntly, some parties will opportunistically (and in some cases, unfairly or wrongly) seek a financial advantage to the detriment of the other party to the contract. The parties responsible for payment may delay payment, or may seek to create or pursue claims in order to justify never paying.
A specific example of this will be projects that are delayed, but whose substantial completion date has not been extended beyond the contractually required deadline, either due to a floating schedule or because the works were ahead of schedule before being delayed. In this situation, expect the owner or higher-level contractor to withhold late damages or slowly pay subsequent payment claims, even if final completion has not been postponed beyond that. of the contract deadline.
There will be several claims against limited pots of money. Some projects will fail and be taken over by a lender, in which case the contractor and subcontractors will engage in a battle over who gets what if any.
Lien claims will be invoked more frequently (which, somewhat ironically, will provide higher-level parties with additional justifications for withholding payment). Claims of lien will be argued more frequently, more intensely, and for longer periods of time. In privilege disputes, there will be a lot more battles over privilege priorities and privilege defenses. Again, these fights will be pleaded more frequently, more intensely, and for longer periods of time. Extraordinary or exotic remedies such as equitable privilege claims will be invoked, pursued and contested.
What to do?
Any party receiving payment should examine their claims. The assumption in a good economy that a debt is as good as money disappears in a bad economy. This review should be carried out on a weekly basis and should focus in particular on the amounts owed on specific projects, the amounts remaining to be earned on specific projects as the work is done and the aging of the receivables – the amounts due on specific projects. receivables are NOT like wine, they are. does not improve with age. Immediate action should be taken to pursue large or old debts, and in particular to pursue both large and old debts.
Claims of lien and surety should be raised early and often and regardless of the fact that assertion of these legal rights may provoke a negative reaction from other contracting parties. Those with lien or surety rights, or defenses in this regard, should familiarize themselves with the process of preserving, prosecuting, or defending against lien and surety claims. My law partner, Luke Tompkins, recently wrote an excellent article on the time limits for asserting certain claims and defenses related to privileges and obligations. Parties should familiarize themselves with these time limits and do everything possible to ensure that their rights or defenses are not lost over time. As a construction lawyer, one of the worst calls I can get is from someone who had a lien claim a week ago but lost it because they waited too long. long to call me.
Parties must ensure not only that they preserve and assert their privilege rights, but also that they preserve and assert their privilege defenses. This includes using and complying with the contract notice mechanism and the lien agent process. Simply put, parties should strive to get ahead of the prosecution of claims and preserve defenses against claims. Managing the flow of money to you while avoiding having to pay twice for the same job is essential for surviving financially.
Parties should carefully and thoroughly review their contracts (both contracts they enter into and contracts already in place on major projects), in particular to ensure that: 1) they are in compliance with all requirements of the contract ; 2) that the notice provisions are strictly observed; and 3) familiarity with dispute settlement provisions. As stated above, either because the pot of money is smaller or because some parties will act opportunistically, more claims will be contested and litigated. Thus, it is imperative that no defense or claim is given to the other party in the event of strict non-compliance with the requirements of the contract. Likewise, more disputes will go to litigation and therefore a thorough understanding of the applicable dispute resolution process is necessary to prevent claims or defenses from being compromised by not following the correct procedural steps from the outset. As discussed in more detail in Mr. Musselwhite’s article, in times of crisis there are legal mechanisms (generally referred to as “force majeure”) that can excuse the delayed or otherwise deficient performance of a party. However, the exact remedy and the extent to which a party is entitled will depend heavily on the parties’ written contract.
Parties should also familiarize themselves with government programs available to help financially. The Small Business Administration (“SBA”) has an emergency loan funding mechanism that was in place before the coronavirus outbreak. There are pending proposals for payroll tax relief and improved emergency lending through the SBA. At the time of writing, bills to this effect have been passed in the House, but have not yet been passed in the Senate.
Know your customer. This is important for two reasons. First, if you’re doing work for a homeowner, general contractor, or senior contractor, you give them credit. Working for someone you don’t know well under these circumstances is no different than lending hundreds of thousands of dollars to a stranger on the street. The loan can be properly documented, but it is unlikely to be repaid in full, if at all. Second, the construction industry relies on subcontracting chains. Often times, the party you legally contract with is different from the party you ultimately work for (and who ultimately has the money). Knowing who you are legally working for and who you are ultimately working for (and who is in between) is essential to successfully asserting claims and lien and surety rights. If this knowledge is lacking or incomplete, then you might as well find the first stranger on the street to give your hundred thousand dollars.
Always recognize, money is king. It is neither glamorous nor exciting and will not earn any return at current interest rates. However, cash gives you the ability to weather the storm, the ability to avoid capitulating for a quick payout, and the ability to take advantage of any opportunities that may arise.
Just because you’ve heard all of the above doesn’t mean it’s not important to review your adherence to best practices, especially now. Tough economic times await the construction industry, making it all the more imperative that you act to preserve and pursue your claims and defenses. It’s no different than we reflexively do the things we should have done all along to avoid the “normal” flu.
As with any crisis, there will be opportunities that arise from the coronavirus crisis. Don’t miss out on these opportunities. With almost everyone working from home, there are many buildings with deferred maintenance or layout needs that are no longer filled with people whose presence would normally prevent heavy construction activities. Creative industry players will be able to come up with many more examples of potential opportunities.
Once health issues and project delay issues are resolved, the financial impacts of the Coronavirus will become paramount. Getting ahead and handling claims, preserving claims and defending against claims will be essential in protecting the financial integrity of construction owners, lenders, contractors, subcontractors and suppliers. By following or adhering to the lessons learned during the 2008 financial crisis, those involved in the construction process should be able, once again, to survive to fight another day.
© 2021 Ward and Smith, Pennsylvania. All rights reserved.Revue nationale de droit, volume X, number 100