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How to Avoid Coronavirus-Related Surety Claims in Construction

Mar 12, 2020 Decorative image

Surety companies know that construction is impacted as much by local supply and demand as it is by national factors like tax policies, inflation, and government infrastructure programs. Rarely does the surety industry see a global risk to construction like novel coronavirus (COVID-19). It’s best to be prepared.

Coronavirus and the Construction Supply Chain

While some import-dependent industries are getting hit hard by supply chain disruptions due to the virus, the construction industry is much better insulated. According to data pulled by Hylant from the St. Louis Federal Reserve, imports of building materials and supplies represent less than .02% of all construction spending in 2019. Contractors should be able to avoid the worst of import supply disruptions by sourcing materials from local manufacturers and suppliers. For the time being, there is no shortage of U.S.-based suppliers. As the virus spreads domestically, U.S.-built supplies of building materials could be a major concern for supply chain managers and project managers.

For equipment coming from overseas, especially Asia, prolonging capital expenditures and extending the life of existing equipment may be a prudent strategy. Of course, operating older equipment may pose unique risks to safety and insurability.

The biggest wildcard in the event of a mass outbreak is related to labor. Unfortunately, the labor market in most areas of the U.S. was already very tight pre-coronavirus. Should local outbreaks occur, finding labor to complete projects will get much tighter. Travel restrictions and airlines limiting flight schedules due to the virus will limit availability to bring in outside labor.

Steps to Reduce Likelihood of Claims Against Bonds

Hylant Surety recommends the following to make sure schedule delays related to labor and material shortages don’t cause a claim against a bond:

Force Majeure (Act of God): Have legal counsel review all major contracts for force majeure language. This language can provide schedule relief due to shortages of labor and materials in the event of an “act of god.” Unfortunately, many contracts do not specifically include pandemic and endemic clauses in the force majeure language.

Plan for the Risk: Encourage project managers to add COVID-19 into their project risk registers and create risk mitigation strategies for labor and material shortages. Vet plans with project teams to ensure there is consistent planning based on guidance from the Centers for Disease Control and Prevention, Occupational Safety and Health Administration, and state and local officials.

Be Proactive: If there are concerns about risk to a project, get the surety company involved proactively.

Communicate: In areas impacted by COVID-19, contractors and subcontractors should sit down with project owners, construction managers, owners’ reps, and/or general contractors to discuss contingency plans and risk mitigation strategies. Try to discuss liquidated damages and other contractual penalties for schedule delays, and see if a mutually beneficial agreement can be reached.

Review Your Backlog: Align your available resources with the current backlog. If resources are pulled into a job that is impacted, see if there are projects in the pipeline that the owner may be willing to defer or cancel until COVID-19 is under control. Many owners will not want to continue work on a jobsite with COVID-19 exposure.

Assess the Financial Situation: A project that looked great six months ago may quickly become a cash drain if up-front payments are made to suppliers. Look at planned capital expenditures and see if any equipment is coming from countries impacted by COVID-19. It may make sense to defer these instead of making large deposits. Also, figure out long lead time materials where deposits were made. Monitor them to ensure COVID-19 does not negatively impact the ability to procure the items. It might be prudent to delay capital expenditures and projects with long durations until there is more certainty. This can help shore up working capital and conserve cash in the business.

Be Safe and Don’t Panic: Primary to all is continuing to be safe. Only accelerate schedules if resources are available and well planned. Ensure that project managers and foremen are monitoring the site for individuals who appear sick. Always continue to enforce strict jobsite safety rules.

Hylant: Here to Help

The construction industry prides itself on facing down challenges and finding solutions. This time will be no different. However, COVID-19 possesses a unpredictable risk that many contractors may never have anticipated. Should COVID-19 cause a schedule slippage on a bonded project, contact your local Hylant surety expert. We’re here to help proactively navigate the surety relationship to avoid claims.

Visit the Hylant Coronavirus Resource Center at www.hylantcoronavirusinfo.com to access a wide variety of materials designed to help you navigate these unprecedented times.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.

Amar Patel, Senior Risk Advisor, Surety, Hylant Risk Management Practice