7 Contract Provisions to Avoid Loss of Liquidity in Construction Business, Apart from Force Majeure

Guide on Construction,COVID-19 & Managing Loss

Since the initial days of its spread, COVID-19 has created a sense of havoc amongst the construction industry. The rapidity with which it has spread from Asia to the United States, most of the construction firms are facing the fear of loss due to delays on deliveries.

Even though some construction companies are wondering to take advantage through force majeure practices, there are chances that it could only help with the partial relief. This is because recovering loss of time and costs need construction firms to not only aim at the cost associated with the delays but evaluation of the contractual rights related to prolongation.

Though taking advantage of tools like ProjectPro, a construction estimating project management software to keep track of the cost, time, and other project-related data can help, it is essential to be informed of the legal possibilities when need to avoid any unwanted losses. Therefore, to help construction companies, here we have a list of 7 contract provisions to avoid loss of liquidity in the construction business, apart from force majeure that can be exercised depending upon the terms of the contract and project.

Change in Law

Now, this is something very common and most construction firms are already familiar with its concept.     

  • Under this, additional time or cost or both could be availed under the statement of State or Federal laws issued concerning the present condition and project performance in regard to the contract.
  • Besides, the change in law provisions may be applied regarding force majeure conditions or even as a solemn clause.
  • In other words, the advantage provided under special provisions will only be executed depending upon the contractual language.

Emergency

In certain cases, the special provisions are implemented for relief in case of an emergency. One such example could be found under the standard emergency clause issued by AIA.

Under this, in an emergency that affects the safety of people or property, the contractor needs to act at the contractor’s discretion to avoid injury, loss, or damage.

However, the extension of time and compensation could be claimed by the contractor on account of emergency provided under articles 15 and 17. 

Note: For more details, AIA document A201-2017 & 10.4 could be followed. 

These emergency provisions allow the contractors to get an extension and suspend the work for a specified amount of time.

Apart from this, emergency provisions may provide an avenue for recovery of compensation and time in regard to isolated events such as shutting down the project for a particular amount of time. This may be disinfecting the site, infection in employees, or finding a new place to take on lease where meetings could be held in consideration to social distancing.

Emergency in construction industry

Unit Price/Escalation Provisions

Escalation related provisions allow equitable adjustment in the contract, in case the quantity of a material is not appropriate to create a substantial inequity.

Since COVID-19 has shown a severe impact on the global supply chain, the lead times are likely to be increased along with the cost concerning the equipment and material outside the contemplation of parties in which the contract has been agreed.

But still, the provisions which support escalation or unit price changes (like COVID-19) can create a substantial inequity mandating the relief. However, taking advantage of accounting software for construction industry could help track all the costs associated with the products or resources

Unit price escalation & provisions in construction industry

Change Order Related Provisions

Change order provisions allow recovery of cost and time as a result of any disruptions to the progress. In specific cases, contractors may receive a written informal directive from the project owner mandating the change to the existing scope of work.

The same could also happen in case the provisions are needed to be enforced between the general contractor and subcontractor. During such a situation, the contractor has to work on the written orders and avoid any commencement of work before a written order for the same is issued from the owner.

In simple words, any changes made to the project status in regard to the provision should be done through documentation.

Change order related provisions in construction industry

Provisions to Halt Work

Under emergency or unfavorable circumstances, which involve any acts, directives, or omissions where the contractor has the written orders, the work can be halted.

During such an event, the contractor can be entitled to an extension on time and compensation of cost due to shutdown which may involve cost related to delay, shutdown, and resuming of the work.

However, to implement Stop work provisions, strict notices, and compliance are required. But still, having proper work data from past available on field service job scheduling software could help justify the past performance of the project.

Provisions to halt work in construction industry during covid19

Termination or Suspension

Suspension provisions include the right to suspend the project for a limited amount of time under the suspension clause in the contract which is exercised due to hazardous situations around.

This means the likeliness or actual spread of COVID-19 at the site constitute the hazardous conditions in which suspension of the work could be allowed plus the benefit of a time extension and cost recovery. 

On the other hand, termination of the project for a definite period can be done under the government orders or act applied to the contract. If applicable to the contract language, compensation on costs, overhead, and profit for incompletion and termination costs can be entitled.

This is because termination of the contract falls under extreme remedies and it needs careful consideration of the effects before invoking termination.

Termination or suspension in construction industry

The Additional Consideration for Taking Benefit of Provisions

Issuing notice is an essential condition to exercise the provisions related to remedies. However, this needs contractors to closely watch the contract terms in context to public work and notice requirements to avoid the potential claim of waiver and reserve the necessary rights. 

Though regulation related to COVID-19 may hinder compliance to notice related requirements, substantial compliance can be used to get over failure to actual compliance for generating notice.

Apart from this, exercising two or more provisions at the same time may lead to a clash of terms that may cause resolution to dispute problems. For instance, AIA provisions demands claim to be submitted to the initial decision-maker and then worked as a subject of mediation but ignoring provisions related to dispute resolution may leave the contractor deprived of additional compensation. 

Also, for the claims associated with COVID-19, the compliance notices should be provided to the subcontractors from the contractor’s end as it can help timely claim submissions. While the failure to do so can affect the contactor’s ability to pass the subcontractor’s claim to the project owner. 

The Crux

Concluding it all, the entire process to avoid loss of liquidity and get compensation on time and money is a case sensitive concern which is restricted to time. The inability to align well with the applicable compliances and provisions may cause the suffering of claims. In short, it only needs careful checks on the documents, provisions, and be prepared for all the challenges. 

Preventing loss of liquidity in construction industry

However, aligning with a tool like ProjectPro that has capabilities of Dynamics 365 Business Central could help you get track of all the resources necessary to prevent loss. It can help you explore all the essential data like cost, timeline, contracts, subcontracts, and all other essential project details that are necessary to justify delays and avoid the loss that construction firms may encounter amidst or after the COVID-19 crisis.

Good luck!

Saving yourself from any loss of liquidity is entirely the matter of keeping records and resources. Moreover, having an effective construction accounting erp solution like ProjectPro could help store all the data and records that can be used when required. Request a demo today!

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