Be wary of COVID-19 contractual waivers

Architect, engineer and foreman discuss with blueprint in office

“We are all in this together.” That was the refrain heard throughout society when the pandemic was finally recognized. But anyone who has experience in design and construction knows that such a maxim is not a truism in the construction industry. From the time the first disruptions and lockdowns occurred, attorneys representing construction firms have scrutinized force majeure provisions and compensation structures of construction contracts to obtain extensions of contract time and increases in the contract sum for the extra time to complete a project and the additional costs forced on contractors by increased government regulations and “suggested” practices.

Some owners—especially developers who want greater certainty in the cost of projects and the length of time needed to put the capital asset in place—have countered by adding provisions in new contracts that limit the ability of contractors to demand more time or money. Similar provisions are showing up in design contracts.

A typical provision from a developer in a design contract states the following:

It is specifically acknowledged, understood and agreed that the Fee; the Scope of Services; the Project Schedule and the Design Schedule (and all milestone and completion dates contained therein); and Consultant’s Key Personnel/staffing plan for the Project and Services reflect and include considerations necessitated by the current COVID pandemic; including, without limitation, governmental and quasi-governmental agencies delays; suspensions and interruptions of work and/or services that are in place or scheduled; as well as the restrictions on the working environment, construction means and methods; and size and proximity of work forces and worker productivity that are expected to follow as a result thereof. Accordingly, in no event shall the COVID pandemic or the impacts thereof result in any increase in the Fee or entitle Consultant or its Subconsultants to any claim for adjusted or additional compensation, general conditions or damages of any nature.”

So what does this provision mean to a design firm? And how does it affect the firm’s professional liability claim exposure?

Firms facing such restrictions on cost recovery should include a contingency in their fee for the shifting of the owner’s risk to the firm. A design firm might have a protocol in place to deal with issues such as reduced staffing forced by illnesses, restrictions on operations, and compliance with ambiguous and rapidly changing requirements. However, being resilient has a cost and that cost should be built into the fee if it cannot be recovered when the situation changes.

Such restrictions also create an increased risk of professional liability claims in two ways:

  • Firms forced into practice management constraints might not be able to meet their own quality control/quality assurance metrics. Accepting the risk shifting means that “unforeseen conditions” and “impossibility of performance” arguments no longer have relevance. So either in the design sequence or during construction observation, the firm might find itself performing at a level that does not meet expectations. Because of this, claims will follow.
  • The other source of claims could come directly from contractors. If contractors are forced to accept limits on the contract time and contract fee, they will reach out to any possible source of cost recovery. Whether the state allows them to sue the design firm directly for economic loss or they have to go through the project owner, those claims are likely to come.

So if you see such a COVID-19 waiver of your rights to modify the contract, be wary. Look at the project type, your internal procedures, and your ability to anticipate changes and restrictions on how you practice. If you and your legal counsel feel that you can proceed, make sure you charge the project owner for the risk you are absorbing.

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