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Construction Shutdown - A Strategy for Developers

Strategies for Developers enduring COVID-19 shutdowns

Construction projects across the country been shut down to help control the spread of COVID-19. State and local governments have issued orders and guidelines that have resulted in closures of many businesses throughout the country. In some cases, construction is allowed to continue; however, many regulatory orders require construction projects to close down. Securing the property, protecting existing improvements, demobilization, remobilization, salaries, insurance, etc. can result in significant costs which are not always clearly allocated in construction contracts. Partner contacted Lisa Glahn of Foley & Lardner to talk about how her clients are handling this unique risk.
 

Lisa, can you tell us your client’s biggest concerns in this situation? 

"Most clients are concerned with minimizing disruptions to their construction projects. When your construction project has been shut down by a regulatory order, disruption is a given. But even when there is no direct shut down order impacting your project, contractors may find it difficult to staff jobs or obtain materials to continue the work. In many cases, getting to the truth of project status so that a fair and equitable "standstill" can be agreed upon is critical. Unfortunately, many clients face shutdown in the context of troubled projects may already be exposed to increased costs or schedule delays that may merely be masked by shutdown orders. It is a complicated landscape and clients are primarily concerned about navigating to the other side of it."

What can developers and owners do to control risks?

"A little advanced planning can go a long way toward minimizing the impact on costs and schedule. Ideally, clients want to make sure costs and changes are adequately documented to avoid frivolous claims later. Daily my team is working with clients to develop Standstill Agreements to document the key elements and issues necessary to temporarily suspend projects either involuntarily, due to a shutdown order, or involuntarily because of health and safety concerns even when projects are legally allowed to continue."

Is there a standard form for a Standstill Agreement?

"No, there is no prescribed form for what we are doing. Someone recently asked me if there is a form agreement produced by the AIA that would cover this. There is not. These types of agreements are something that we created here at Foley after conversations with clients looking for some sort of tolling agreement. It is more aptly a status quo or standstill agreement, however, because we don't want to do anything other than put a freeze on the existing relationship."

What are the key elements of your agreement?

"There are four main points:

  • First and foremost, it is critical to ensure the safety and security of the site. Make sure that any materials that have been stored on site are protected from the elements and make sure that your project is secured and locked down. The question of your ability to continue ongoing security and maintenance during the shutdown period may be dictated by governing orders and counsel should be consulted about such rights.
  • Second, it is critical to agree on a detailed picture of the job from a cost and schedule perspective; basically, forming a snapshot view that can be memorialized in writing. This will be important when things start up again in order to avoid dispute about where things were when the standstill commenced. Also, it is important to know who the subcontractors are, process payment for work in place, and obtain lien waivers to confirm payment and avoid liens during the downtime.
  • Third, it is important to agree on a suspension of any termination rights the contractor may have as a result of the shutdown. Standard AIA construction contracts allow the general contractor or design-builder to terminate the contract for suspended work beyond a certain number of days. Pursuant to that termination right, contractors may even be entitled to compensation for overhead and profit for work not yet completed. That provision, unchecked or unmodified through a standstill agreement, could be a quiet clock ticking that you need to be mindful of.
  • Finally, the general contractor might not have a right to any costs for demobilization and standstill. In order to partner through this shutdown period, we recommend negotiating a "standstill fee" up front while the owner and contractor have roughly equal negotiating positions and to maintain relationship and avoid claims later.

Of course, the actual agreement is more complicated but this gives you the general idea."

Are these agreements typically driven by owners or contractors?

"To some extent, it depends on the reason for shutdown but it could be driven by either the owner or contractor. If shutdown is required, then either the owner or contractor might start the conversation, but some sites will be shut down voluntarily for other reasons. The contractor, for example, may want to suspend construction because workers are not showing up or they are unable to obtain materials – or the shutdown could occur because of potential exposure of workers at the site."

Are there other things owners or lenders should be doing to protect their rights if they don't have a standstill agreement?

"Understanding your governing state and local orders is key. Determining whether construction can continue, not only legally but also from a business perspective, is a critical exercise to undertake. There are cases in which it may be legal to proceed with construction, but unwise due to safety concerns. Taking proactive steps, whether mandated or elective, to carefully shut down the site, document conditions, collect lien releases, and properly partner with project participants can go a long way to avoid problems in the future."

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Agreeing on and documenting the current status of construction and key documents is also important in order to minimize impacts to the property and evaluate future change requests. A Construction Status Report is a process that typically involves third party observation of the property, review of related documentation, and interviews with key stakeholders. The Construction Status Report can range from simple documentation of the construction status through collection and review of contracts, subcontracts, lien releases, plans, specifications, submittals, inventory of materials stored on- and off-site, project weatherization and more.

Construction Status Report

Collect and Review Key Documents:
  • Contract
  • Subcontracts
  • Schedule
  • Pay application
  • Insurance
  • Inventory of on-site and off-site stored materials
    • Inspection, UCC-1, other assurance
  • Lien releases

    Interview Key Stakeholders: 

    • GC
    • Major subs
    • Suppliers

    Review and Document Site Conditions:
    • Access
    • Security
    • Completion status with copious photo documentation
    • On- and off-site stored materials
      • Rough inventory
      • Security
      • Protection from elements
    • Project weatherization
    • Excavations
    • Manpower
    • SWPPP
     

      This is also the perfect time to agree on payments due for work completed to date. In some cases, contractors have aggressively estimated the value of work in place in order to establish working capital since it is impossible to know when work will resume. Carefully vetting pay applications at this point can be critical. 

      The reopening of construction sites and the economy in general is under discussion at Federal, state and local levels, but additional sites could be affected in states in which COVID-19 is still on the rise. For sites that have already been shut down, it’s a good idea to plan for resumption of the work. Considerations of the standstill agreement are likely to come into play in addition to the financial capacity of the general contractor, subcontractors, and suppliers as well as personnel and workforce changes that may impact resumption of the work.