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Supply chain constraints and labor shortages, previously low-risk items in a project鈥檚 life cycle, now pose extreme challenges to the industry in the direct aftermath of COVID-19. Oregon, like all states, has struggled to properly adjust to this disruption. Additionally, companies throughout the U.S, especially in the construction industry, have juggled material availability issues, cost escalations, supply chain disruptions, access to labor, and inflation to varying degrees of success 鈥� with none formulating a concrete method that fits all needs.

There are several ways owners and contractors can protect themselves from market risk, such as effective communication. Early discussions between project owners, generals, subcontractors, and suppliers are now standard practice in identifying potential issues in obtaining materials and adequately staffing projects. These communications not only aid contracting parties in identifying potential delays but also strengthen critical relationships. All contracting parties should communicate with their key partners, such as brokers, sureties, CPAs, and attorneys, to understand if they can afford to undertake the project. These partners help assess whether additional insurance coverages are available to mitigate the risk.

Contractor failure is costly and increases the project estimate threefold. Consequently, generals should consider conducting subcontractor pre-qualifications to reduce risk. This is essential in verifying all sub-bid numbers (particularly where clarifications, exemptions, and time limits have been incorporated into the bid) before incorporating those numbers into the upstream contract with the owner. This should be standard practice; however, there are many generals that have not verified sub-bid numbers. Consequently, they become 鈥渟urprised鈥� when a subcontractor refuses to enter a subcontract for the bid amount due to escalations. Most contractors include a window to adjust their bids should certain materials increase by a set percentage before the parties sign the contract.

Standard construction contracts have experienced a significant change following the effects of COVID-19. For instance, 鈥渇orce majeure鈥� has seen an expansion relating to delay provisions, including specific references to epidemics and pandemics. Additionally, such provisions now include protection against acts of God or work stoppages mandated by government authorities and against the failure of material suppliers. Owners and generals beware 鈥� ensure that any delay provision intends to hold you responsible only for those delays that you have control over.

Another trend is the introduction of material escalation provisions. Under a standard lump sum contract, the general typically bears all risk for post-execution cost escalations. These clauses are intended to 鈥渟hare鈥� the pain in a volatile market. Typically, these provisions require contractors to demonstrate a minimum threshold of increase and limit the owner鈥檚 responsibility to a set contingency amount to be first paid out of any contractor contingency fund. Something to consider is whether these types of escalation clauses should apply to all materials or only a subset of materials and whether the owner should get the benefit of any cost savings in the event material costs decline.

We also see a handful of construction contracts with public health and/or COVID-specific provisions that outline a process for addressing impacts relating to known and unknown effects of COVID-19 and resulting government restrictions.

Oregon law underwent two significant changes that are often forgotten:

1, Corporate Activities Tax (CAT) under ORS 317A.125 and

2, New retainage escrow requirements for projects over $500,000 under ORS 701.420(2)(b).

Due to the prompt rollout of CAT, most contractors have figured out how to address corporate activity taxes. Make sure to review who is responsible for paying this tax, particularly as other jurisdictions are implementing similar taxes. Many of these will fall on contractors unless the specific language in the contract identifies which tax each party bears.

Similarly, many contracting parties have forgotten the new escrow requirements concerning retainage. ORS 701.420(2)(b) states: 鈥淚f the contract price exceeds $500,000, the owner, contractor or subcontractor shall place amounts withheld as retainage into an interest-bearing escrow account. Interest on the retainage amount accrues from the date the payment request is approved until the date the retainage is paid to the contractor or subcontractor to which it is due.鈥�

Many project lenders have balked at establishing a separate escrow account for retainage. Many owners have reconsidered whether it is worth the hassle to retain the 5 percent cap. As a result, we see an uptick in either the elimination of retainage in construction contracts or the attempt to waive the requirements of ORS 701.420(2)(b).

These are a few of the issues we are confronting in this semi-post-COVID world. The lesson: don鈥檛 rely on past practices. Take time to talk with the entire project team, including partners, to ensure that additional ways to mitigate risk have been considered.

Angela Otto is a partner in Ball Janik LLP鈥檚 construction and design practice group. Contact her at 503-944-6042 or [email protected].

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91视频 guarantees the accuracy or completeness of any information published herein.