With all the talk about essential businesses, supply chains, and availability of workers, one aspect of the construction industry may not be on your radar.
We checked in with Ron Ciotti, Partner at Hinckley Allen specializing in Construction & Public Contracts law about what legal issues companies should be aware of during this crisis.
Ron, what are some of the issues that modular companies need to be aware of these days?
The two primary issues impacting modular companies are safety and government orders issued at the federal, state, and local level. The COVID-19 pandemic has undoubtedly impacted every business across the country, but the federal government’s guidance to prevent the spread of the disease, as well as Shelter-in-Place Orders issued at the state and local level, have forced companies to change their daily business operations. I expect these limitations to continue to impact the construction industry for the foreseeable future.
From my perspective, the biggest issue any business faces is keeping its workforce safe and healthy. The severity and duration of the symptoms of COVID-19 vary, but it is clear that an outbreak can sideline a workforce for an extended period of time. Further, a single positive COVID-19 diagnosis could temporarily halt business operations due to mandatory quarantine procedures.
All businesses should be aware that the Department of Labor and OSHA have issued new guidelines specific to COVID-19 preparedness for workplaces and for recording workplace exposure. Companies should review and implement these guidelines immediately, if they have not done so already. Companies should also be aware of state and local orders that may affect their business operations. For example, some state and local orders implement COVID-19 safety guidelines, with some requiring construction employees to wear specific Personal Protection Equipment to reduce their risk of contracting or transferring the virus. Factory workers will similarly be affected by these guidelines, and should be wearing appropriate PPE and following CDC and OSHA guidelines, such as handwashing, washing and/or sanitizing clothing after each day, and following social distancing protocols. Following safety guidelines is critical to mitigating the risk of exposure, and potentially severe impacts to business operations. Some state guidelines/mandates have required those workers self-certify they are not experiencing certain symptoms before entering the work site, while other state guidelines require that those working in enclosed structures, such as most modular and prefabrication facilities, be temperature tested on a daily basis before entering the structure. In complying with those guidelines, all businesses should ensure that such testing and certification is carried out in a private area, by a professional, and that such records are kept private to ensure compliance with HIPAA.
B. Government Guidance, Shelter-in-Place Orders, and Workforce Reductions
Nearly all states (and many cities or counties) have issued orders restricting travel and business operations, with some cities, such as Boston and New York City, and counties, such as San Mateo, California, halting local construction projects. The Shelter-in-Place Orders generally contain exceptions for “Essential Services,” which may include construction-related activities. Depending on the scope of the Shelter-in-Place Order, modular and prefabrication companies may be considered an Essential Service, allowing them to continue to operate in compliance with the terms of the applicable order(s). Modular companies should nevertheless be aware that their employees, subcontractors, or suppliers in other towns, cities, or states, may be subject to different orders and different restrictions. Modular companies should anticipate a reduction in workforce resulting from Shelter-in-Place orders and other travel restrictions (both in terms of the number of workers and productivity). For example, certain states have mandatory quarantine procedures for all persons entering the state. This type of restriction has the potential to impact employees that travel across state lines for work. Impacts to public transportation will also lead to workforce reduction.
Some of these issues, such as safety considerations, seem like risks that existed prior to the COVID crisis. Did this crisis add to those risks?
Yes. The COVID-19 pandemic has substantially increased the likelihood and severity of all risks associated with construction projects, modular construction, and prefabrication. Guidelines and restrictions pertaining to COVID-19 are changing every day, and safety guidelines have become particularly strict. Companies not only face fines and even potential incarceration if they fail to follow applicable safety guidelines, they risk exposing employees to the virus and impacting huge portions of their workforce. Companies specializing in modular construction and prefabrication are at great risk due to the concentrated/factory-like work environment and the uncertainty of the scope and length of COVID-19’s impact on timely delivery of raw materials and the price of materials.
Do the risks vary if you are a small business owner or a larger corporation?
Although the risks are similar, smaller businesses will likely face a greater impact – which is part of the reason the federal government has stepped in with a massive and unprecedented $2 Trillion stimulus package directed specifically at small businesses (less than 500 employees for the Paycheck Protection Program). Although safety concerns are similar for businesses of all size, shipping delays, material price escalation, and workforce reductions can place a more significant strain on small businesses. That being said, no business is immune from the impacts of COVID-19. All companies, no matter the size, will want to take active steps to mitigate risk during these uncertain times.
Ron, you’ve highlighted the risk that COVID-19 can severely impact business operations. What are the “Best Practices” modular companies should be considering at a time like this to mitigate this risk?
Broadly speaking, every business needs to (1) understand the guidelines and orders, (2) assess the impacts that those guidelines and orders will have on business operations, (3) develop a plan to mitigate risks, and (4) implement that plan. Modular and prefabrication companies should consider the following points to be among the current “best practices”:
• Follow local, state, and federal guidelines, including Shelter-in-
Place Orders and guidance from the CDC and OSHA;
• Contact your bank and consider applying for the government’s massive
$2 Trillion stimulus aid;
• Review your insurance policies with your broker and consider filing a
• Track the costs of following the CDC guidelines and government
• Use cost codes to track supplier/subcontractor COVID-19 related costs,
impacts, and issues;
• Do not assume that your customer will equitably adjust the contract or
purchase order, you need to provide contract specific notice and make
a claim (even if it is just for “anticipated” delays);
• Inquire with your suppliers about potential supply chain disruptions
and make contingency plans;
• Prepare a path forward by revising standard operating procedures and
revising form contracts/purchase orders.
Do the federal stimulus programs apply to modular companies?
If the company has fewer than 500 employees, then yes! The Coronavirus Aid, Relief, and Economic Security Act establishes a government loan/grant program that will inject upward of $2 Trillion into the economy. This is unprecedented! Under the Paycheck Protection Program, a company may apply for a loan for up to 2.5 times its average monthly payroll (the law caps salaries at a maximum of $100,000, which does not include bonuses). There are no collateral or personal guarantees required. There are no fees from the government or lenders. The amount of that loan that is used for payroll, rent, and other specific costs (complying with specific percentage ratios) within an eight (8) week period following receipt of the loan, may be forgiven (effectively becoming a grant). All companies should assess whether they qualify for this program.
How will contracts and purchase orders dictate whether companies will be entitled to a time extension or additional compensation for COVID-19 impacts?
Companies should immediately review their contracts and purchase orders to determine whether time extensions and additional compensation may be allowed under these circumstances. Certain contracts will allow for a time extension, but not additional compensation, even under the present circumstances where delays are not your fault. Other contracts may allow both a time extension and equitable adjustment to the contract sum. Companies must be aware that contract provisions pertaining to delay and claims often require written notice to be sent within a specific time, in a specific manner, using a specific delivery method, and to be delivered to a specific person. Every contract may have different requirements, so companies should take care in reviewing contracts closely and following the required procedure for notice and claims. Timely notice and good record keeping are key!
How should companies handle record keeping for delays, additional costs, and other impacts?
Companies should ensure that employees are properly documenting and calculating any delays or additional costs experienced as a result of COVID-19. Additionally, employees should make every effort to attend all required project meetings and submit all required project schedule updates, if possible. Companies are wise to review their standard operating procedures for tracking claims/cost and time impacts, and in some cases, developing new mandatory procedures for tracking impacts, including new templates for record keeping, claims, and change order requests.
How should companies handle supply chain disruptions and increased costs of materials?
COVID-19 is a global pandemic and construction materials often come from all corners of the world. Modular and prefabrication companies may experience substantial delays in delivery and higher material costs due to COVID-19 restrictions in other countries. Obviously, shipping delays and added costs will significantly impact companies’ ability to timely deliver their product, as well as bottom line profitability. Companies should review contracts and purchase orders for notice requirements pertaining to delayed material shipments and increased material costs. Companies can also mitigate risk by contacting their suppliers in writing and demanding immediate notice of any potential disruptions, as well as searching for alternative sources of materials.
Is there any way insurance policies will cover the damages arising out of COVID-19?
Yes. Certain insurance policies will cover various impacts arising out of COVID-19. Companies will want to review their policies (e.g., property or business lines) to determine if they have some protection under business interruption, ingress/egress, or civil authority coverage for COVID-19-related losses. Some policies extend coverage for damage caused by viruses or “contamination” while some explicitly exclude damages caused by viruses. Others policies require property damage for coverage.
Regardless of the policy language, it is likely “best practice” to consider filing a claim. Some states are currently considering legislation that will require insurance companies to provide coverage despite explicit policy exclusions (bills are currently pending in New Jersey, Massachusetts, and Ohio). Therefore, companies will want to consider filing a claim (even if the current policy may include coverage exclusions) as potential legislation may retroactively require insurance companies to provide coverage. Companies will want to track their potential COVID-19-related losses and comply with any notice requirements contained within their policies prior to filing claims.
How does the COVID-19 Paid Sick Leave Legislation impact businesses?
The Families First Coronavirus Response Act (FFCRA) created two new emergency paid leave requirements in response to the COVID-19 pandemic: (1) Emergency Paid Sick Leave and (2) Emergency Leave under the Family Medical Leave Act (FMLA). These provisions apply through December 31, 2020. Under Emergency Paid Sick Leave, employees who qualify may take up to 80 hours (two weeks) of paid sick leave for reasons specifically related to COVID-19. Various factors determine whether the employee is entitled to full or partial pay during this leave. Under the FMLA expansion, employees who qualify may take an additional 10 weeks of paid expanded family and medical leave at partial pay. These paid leave requirements apply to certain public employers and private employers with fewer than 500 employees. Small businesses with fewer than 50 employees may qualify for exemptions. The Department of Labor has issued detailed guidelines on all employer obligations created by FFCRA.
What steps can modular companies take now to protect themselves in the future?
Companies should consider adjusting their standard operating procedures and updating their standard form contracts to account for future impacts from COVID-19. Contracts should be used to anticipate and fairly allocate risk. Companies will want to consider the future impacts of COVID-19 and seek to address and allocate these risks in new contracts. For example, a material price escalation clause in a contract can mitigate the risk of rising material prices by shifting that risk onto the customer. Similarly, delay clauses that allow for an adjustment of contract time and contract sum for delays caused by events beyond the company’s control will likely shift the risk of COVID-19 impacts to the customer. Finally, given the broad scope of COVID-19, companies signing contracts today or in the future will likely be deemed to have imputed knowledge of the world’s circumstances and will be deemed to have assumed the risk of COVID-19 impacts. Companies should consider addressing this “imputed knowledge” in their contracts by establishing that the contractual relationship does not anticipate further COVID-19 impacts. Companies that plan for and address these risks in their contracts now will be better positioned for future uncertainty regarding COVID-19.