Rising construction costs as a result of COVID-19

Riccardo Del Vecchio. Photo courtesy Miller Thomson.

The COVID-19 pandemic has caused significant disruptions to the construction industry as a whole. Backlogs in supply and increases in demand, commodity prices and labour costs have all resulted in a significant rise in construction costs and disruptions, which are critical variables for consideration for owners and contractors building projects under fixed-price arrangements.

As the number of construction projects increases throughout the pandemic, the rising costs are not expected to dissipate any time soon. It is critical for industry stakeholders entering fixed-price agreements to understand the key contractual provisions that may provide some relief against cost volatility.

That said, there is no universally applicable solution to rising costs in construction. Case law reinforces this idea by suggesting the ability to invoke relevant contractual clauses as a result of COVID-19 derives from a fact-driven analysis.

Detailed force majeure clauses

The legal applicability and scope of a force majeure clause is dependent on the explicit language in the relevant contract. Such a clause explicitly including “pandemics, epidemics and/or diseases” will likely capture the COVID-19 pandemic, thereby providing some relief to contractors in the face of significant delays due to supply shortages and increased costs.

A clause without such a reference, on the other hand, will likely not be held to include events like the current pandemic. In such cases, contractors will rely on a legal court’s interpretation of the surrounding facts and the contract as a whole to determine if relief is available.

There is no universally applicable solution.

In a recent case involving Ontario’s Windsor-Essex Catholic District School Board (WECDSB), by way of example, the court was asked to determine if a force majeure clause in a lease agreement included and captured the pandemic and, thus, relieved the tenant from its obligation to pay rent. While the lease agreement in this case did not stipulate a pandemic, epidemic or disease as a force majeure event, the court looked at the contract as a whole, applied the ordinary meaning of the terms and found there was an occurrence of an event outside the party’s control—a provincial governmental action, i.e. enacting lockdown restrictions in response to COVID-19—that prevented the landlord from providing the tenant with the leasable area to the tenant. Therefore, the tenant was released from its obligation to pay rent.

The interpretation and application of a force majeure clause are highly dependent on the wording of the contract and the facts of the case. While there may be grounds for recourse through the courts, as seen in the WECDSB case, it is advisable for owners and contractors to consider force majeure clauses that explicitly include pandemics, epidemics or diseases to provide relief from volatile costs and unexpected delays, especially given the experience of the pandemic.

Material price escalation clauses

Parties to fixed-price construction contracts should also consider including a material price escalation clause. This accounts for the risk of unexpected market fluctuations that are no fault of the contractor, as with the shortages currently driving up material costs throughout the construction industry.

Rising costs are not expected to dissipate any time soon.

The clause informs the project owner the bid or contract price is based on current material prices, but is subject to change in the face of a fluctuation or shortage. This reduces the contractor’s need to inflate project costs to account for such fluctuations and, in turn, reduces the chance the project owner will pay for a risk that may never occur.

A market price escalation clause should clearly stipulate (a) the percentage change in the price of the applicable materials or (b) the number of days during which materials are unavailable.

Doctrine of frustration

In the absence of an applicable force majeure clause, a contractor may be relieved from performing its obligations by arguing the contract is frustrated by the COVID-19 pandemic. It is important to note the threshold for establishing frustration is very high, as it is a significant remedy.

Frustration occurs when the supervening event, absent default of either party, renders performance of the contract impossible. This is because the circumstances would render it significantly different from what was originally contemplated in the contract.

Case law, however, suggests an increase in prices and market fluctuations are an insufficient basis for invoking the doctrine of frustration.

The threshold for establishing frustration is very high.

The role of consulting engineers

In addition to being mindful of contract clauses, consulting engineers have an important role to play in helping mitigate construction costs. As professionals in planning and design, they should be mindful of the potential—and likely—problems facing projects over the next year.

The pandemic era has been plagued with shortages of lumber, steel and other materials. The extended shutdown of sawmills across Canada, for example, created significant backlogs in lumber supply; while restrictions have now been lifted, many sawmills are still playing catchup. And many reports project demand for lumber will continue well into 2022.

It is advisable to consider force majeure clauses.

In the face of uncertainty, there is no guarantee prices will fall back to pre-pandemic rates, at least not any time soon. Increased costs and delays in sourcing materials can pose significant challenges for construction projects with respect to meeting budgets and timelines.

It is not business as usual, but consulting engineers are well-positioned to proactively assist contractors and owners with considering and finding suitable alternatives that are more resistant to commodity price fluctuations. With respect to framing, for example, such alternatives as mortar, earthen plaster and insulated concrete forms (ICFs) may prove more cost-effective and readily available, if appropriate to the circumstances. Further, with the growing popularity of prefabricated modular structures, these alternatives may soon become the norm.

Riccardo Del Vecchio is a partner in and leader of construction litigation for Miller Thomson LLP’s construction law team and Sabrina Lau is an articling student. For more information, visit www.millerthomson.com.