The effects of the pandemic on general contractors’ supply chain

The world is currently affected by a suspension of activities in almost all sectors. In Quebec, this situation also means a halt to construction sites, but as of April 20, some residential construction sites will be able to resume their activities in order to avoid a housing crisis.

In addition to the partial recovery, many general contractors will be facing supply problems, as their material suppliers have suspended or slowed down production. This situation will have a major impact on the supply chain for construction sites in Quebec.

It will therefore be important for contractors to anticipate delays in the delivery of materials, or even the impossibility of obtaining them. In the meantime, some suppliers may find themselves insolvent or unable to produce the goods they require. In spite of these obstacles, real estate developers will have to complete their projects on time, in line with the commitments they have made to their buyers.

Invoking force majeure for a materials shortage?

If a general contractor’s work on a project is delayed, he will be in default of his contractual obligation to the property developer. However, should the general contractor’s delay cause prejudice to the developer, he could exonerate himself from liability by proving that the prejudice resulted from force majeure. To find out what constitutes force majeure, we invite you to consult our article on this subject.

The very concept of force majeure will take on its full importance in relation to the supply chain, since the general contractor should be able to demonstrate that the situation affecting the performance of his obligations to the promoter was unforeseeable and irresistible. This event must have the effect of placing the general contractor in a situation that could not have been foreseen at the time the construction contract was signed, be unavoidable in its occurrence and represent an event that prevents performance by anyone, not just the general contractor.

The existence of the pandemic and the fact that it could represent an event of force majeure do not allow us to assume that it will automatically qualify as force majeure between the parties concerned. The facts, the contract and the particularities of the business will have to be analyzed.

Nevertheless, the contractor still has an obligation to minimize the impact of any material shortage, by making every effort to overcome his supply difficulties and try to obtain the required materials from another supplier, even if at a higher cost. Thus, the general contractor cannot justify 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 seeking solutions to ensure that the supply chain on a construction site is affected as little as possible. As long as the necessary efforts have been made, it can be assumed that one of the force majeure criteria will be met.

What to do about the additional costs that may be generated by the use à alternatives to the affected supply chain?

In the context of a fixed-price construction contract based on plans and specifications, the general contractor will be responsible for any additional costs incurred for alternative materials, subject to any additional requests or “extras” placed by the developer. The use of alternative materials has a direct influence on costs, since this type of contract stipulates that the general contractor undertakes to perform the work in return for a fixed fee, regardless of the cost incurred. The agreed price usually reflects a surplus, since the general contractor anticipates the possibility of unforeseen circumstances.

What are the consequences for a cost-plus contract?

This type of contract usually involves the general contractor undertaking to carry out the work and submit invoices to the property developer for reimbursement, plus additional remuneration in the form of a lump sum, percentage of cost or hourly rate. In this context, the property developer runs the risk of having to pay additional costs for replacement materials. That said, the general contractor’s remuneration, which often includes administration and fixed costs, is unlikely to change if the construction site is extended.

What about a construction manager?

This type of service has gained in popularity in recent years, and must be analyzed differently from the services of a general contractor. The first thing to consider is the type of services provided by the construction manager. Are they only providing services, or are they also responsible for the execution of the work? Is the remuneration established on a cost-plus, hourly or lump-sum basis? Some contracts may provide for more than one method of remuneration for the same project. In any case, a management contract is not a “turnkey” type of contract.

In this case, as in others, the delay or impossibility of receiving certain materials or supplies on site could also lead to delays in project delivery. However, the general contractor will not systematically be able to allege force majeure to justify this delay in delivery date, but must instead demonstrate that the delay is directly attributable to a force majeure experienced by his supplier, and that he has done everything in his power to remedy the situation.

The courts have already confirmed that the act of a third party does not constitute an event of force majeure, unless it has the same characteristics and all precautions have been taken to meet the obligations. A contractual fault on the part of the contractor or his supplier is therefore not automatically set up against the property developer to justify a delay in the delivery of a project.

The general contractor must therefore be diligent in keeping the property developer informed of the possible consequences of the situation on the supply chain, as well as on the project schedule and budget.

By Audrey Robitaille

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