Owners are likely to take action to decrease risk and maximize flexibility following COVID-19 in order to mitigate growing concerns, such as the possibility for projects to stop and start due to supply chain disruptions or decreased demand for the scope of the project. Additionally, further medical guidance may necessitate a change to the design of the final project. Below, our Houston construction lawyers discuss the kind of contract terms contractors can expect to face in a post-pandemic landscape.
The Best Option Is a Cost-Plus Contract
The cost-plus contract is the most flexible contract type and pricing model for owners and contractors alike. In this contractual agreement, the contractor is reimbursed for all agreed-upon construction-related expenses plus a fee, which is a specific percentage of the costs or a fixed amount for profit. This model is great for the owner because it alleviates any concerns that the contractor may attempt to drive up costs and provides certainty that the project will remain within a specific price range. Likewise, it’s beneficial for the contractor to be assured that all expenses associated with the project will be covered.
Both parties benefit from the flexibility of the model, which allows the design, material, and scope of the work to be modified throughout the project. If pricing does become an issue or the supply chain is disrupted, then materials can easily be switched out. However, as with any type of contract, there are drawbacks to be aware of. Reimbursement means that you’ll be expected to front your own costs as the contractor. This can easily put both the owner and the contractor in a bind if cash flow is disrupted. Reach out to one of our Houston construction attorneys if you have any further questions regarding cost-plus contracts.
Integrated Project Delivery May Help to Absorb Risk
Another type of contractual model is integrated project delivery (IPD). IPD has been gaining traction over the years as a method that sets out to optimize efficiency based on a shared risk/reward model with waivers of liability between team members and guaranteed costs. The method generally encourages collaboration of knowledge and experience from all stakeholders, rather than just the owner, designer, and contractor.
Owners and contractors may be more likely to opt for integrated project delivery due to the model’s potential to avoid delays, budget overruns, and change orders. Additionally, the profit for the project is set aside in a “bucket” to be divided at the end according to a predetermined percentage. In theory, this should incentivize all members to come to an agreement before resorting to legal measures, such as force majeure. Everyone shares in the reward and thus, shares in the risk.
The Bottom Line
The bottom line is that even other forms of construction contracts may be amended to include provisions that will protect the owner and contractor. Contractors are likely to see more and more contracts with termination provisions that allow the owner to terminate without cause and without penalty. Likewise, they may see costs outlined with regards to how much they may be entitled to if work is temporarily suspended due to a project shutdown. More likely to arise are provisions that allow for project slowdowns, rather than shutdowns that lead to further expenses. For legal assistance navigating the post-pandemic landscape with changing contract provisions, consult with a Houston construction attorney with Cotney Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.