The Impact of the Pandemic on the Supply Chain of General Contractors
The world is currently affected by a suspension of activities in almost all sectors. In Québec, this situation entailed the closure of all construction sites, but as of April 20, some residential construction sites will be allowed to resume activities to prevent a housing crisis.
In addition to the partial recovery, many general contractors will face supply problems as their suppliers have either ceased their production or reduced it. This situation will have significant impacts on the supply chain for construction sites in Québec.
It will be essential for contractors to anticipate delays in the delivery times of materials or even the impossibility to obtain them. In the meantime, some suppliers may find themselves in insolvency or unable to produce the materials they are looking for. Despite these obstacles, real estate developers will have to carry out their projects within the deadlines to which they’re committed towards their buyers.
Invoking “force majeure” for a shortage of materials?
If the execution of a project by a general contractor should be delayed, he will be placed in a situation of failure to fulfill his contractual obligation to the real estate developer. However, if such a delay on the part of the general contractor caused prejudice to the real estate developer, he could be exonerated from his responsibility by proving that the damages result from a force majeure. To understand what constitutes a “force majeure” read our BloG article which deals with this situation.
The very notion of force majeure will take on its full importance in the context of the supply chain since the general contractor must be able to demonstrate that the situation which affects the execution of its obligations towards the real estate developer was unforeseeable and irresistible. This event must, therefore, have the effect of placing the general contractor in a situation that was impossible to foresee at the time of signing the construction contract, be unavoidable and prevent anyone (and not only the general contractor) from executing the obligation.
The existence of the pandemic and the fact that it could constitute an event of force majeure does not necessarily imply that it will automatically qualify as “force majeure” between the parties concerned. The facts, the contract and the business specifics will need to be analyzed.
However, the general contractor still has the obligation to minimize the impacts of a potential materials shortage of materials, by making every effort to overcome its supply difficulties and try to obtain the required materials from another supplier, even if it is at a higher cost. Thus, the general contractor cannot claim the absence of a solution by the fact that the possible solution is more difficult or more expensive.
The general contractor must, therefore, be proactive in finding solutions so that the supply chain of a construction site is minimally affected. Thus, to the extent that the necessary efforts have been made, it can be assumed that one of the force majeure criteria will be met.
What if additional costs arise from using alternatives to the affected supply chain?
In the context of a fixed-price construction contract according to plans and specifications, the general contractor must assume the additional costs incurred for replacement materials, excluding requests for additional work or « extras » placed by the real estate developer. The use of alternative materials will have a direct influence on costs, since this type of contract provides that the general contractor undertakes to perform the work for a fixed fee, regardless of the costs incurred. The agreed price usually reflects a surplus since the general anticipates the possibility of contingencies.
What are the consequences on a cost-plus contract?
This type of contract usually implies that the general contractor undertakes to execute the work and submit the invoices to the real estate developer who reimburses them, in addition to additional remuneration given in the form of a lump sum, percentage of the cost or hourly rate. In this context, the real estate developer risks having to pay the additional costs related to replacement materials. That said, the general contractor’s compensation, which often includes administration and fixed costs, is unlikely to change if the construction continues.
What about a construction manager?
This type of service model has grown in popularity in recent years and should be viewed differently from the services of a general contractor. It is essential to consider the type of services provided by the construction manager. Is it only services or is it also responsible for the execution of the work? Does the remuneration that has been established provide for an increased cost price, an hourly rate or a flat rate? Some contracts provide several modes of remuneration for a same project. In all cases, the management contract does not constitute a “turnkey” type agreement.
In this case, as in the others, the delay or the impossibility of receiving certain materials or supplies on the site could also lead to delays in the delivery of the project. However, the general contractor cannot systematically justify this delay in the delivery date, but must rather demonstrate that the delay is a directly attributable to force majeure experienced by his supplier and that he did everything to remedy the situation.
The courts have confirmed that the act of a third-party does not constitute an event of force majeure unless it contains the same characteristics and that all precautions have been taken to comply with the obligations. A breach of contract by the general contractor or his supplier cannot, therefore, be automatically set-up against the real estate developer to justify a delay in the delivery of a project.
The general contractor must, therefore, be diligent and to keep the real estate developer informed of the possible impacts of the situation on the supply chain, as well as on the project schedule and budget.