No one can deny that the coronavirus pandemic has had an affect on construction projects, both in increased costs and time delays. Across the country, projects have been affected by shutdowns and changes in safety protocols. But how do you quantify these costs? And who should pay for them? Submitting change orders for cost and time increases related to COVID-19 can help get that conversation started.
Pandemic cost changes
Maxim Consulting Group, the research firm overseeing the study, suggests that contractors add 18% to current and future contract prices to make up for pandemic-related effects.
The studies documented three types of losses contractors have suffered: mitigation, productivity, and business costs.
These are costs related to mitigating the effect of the virus on job sites. They include added training, health screening, cleaning, and added admin time related to documenting all these measures.
New PPE requirements have raised costs, as have all the planning meetings required to figure out how to best prevent spreading the virus on site.
In addition, if a site has a confirmed positive case, there are costs for a full cleaning of the job, plus the costs of a shutdown while mitigation measures are implemented, and workers are quarantined.
According to the studies above, mitigation measures created an 8.8% loss on over 113,000 man-hours for mechanical, electrical, and plumbing (MEP) subcontractors.
Productivity losses were directly felt in areas where construction was completely or partially shut down for a period of time. In addition, social distancing requirements, staggered shifts, and reduced crew size (all implemented to reduce the number of workers on a project) have created project delays and slowdowns.
Extended project schedules lead to more costs and lost profits, as companies can’t take on as much work as they would’ve before the pandemic.
These costs represent a 9.2% loss, according to the surveys. The reports found that there was 85 minutes of lost production per employee 8-hour shift.
That lost productivity can destroy a contractor’s bottom line. “For specialty contractors, a loss of 10% labor productivity often results in a 100% loss in project profitability,” according to the report. “This means that on average in the study results, contractors are losing over 7% on projects.“
Other costs related to dealing with the impact of the pandemic also affected many companies. These costs included:
- Projects being cancelled or delayed
- Time spent trying to understand the rules and regulations being provided by various government agencies
- Added time in meetings with clients, vendors, and employees to understand the effect of the pandemic on these relationships
Other effects that businesses felt were supply chain delays, the cost of additional training for workers, and added safety personnel.
Covering COVID-19 costs with change orders
The study authors encouraged contractors to submit change orders to cover cost increases and delays from lower productivity brought on by COVID-19.
- Download NECA’s free change order calculator (Excel)
- Watch video instructions: How to use the change order calculator
If you are a project owner or GC working on a project that suffered losses during the pandemic, it is almost a guarantee that you can expect a change order to try to recoup some of these losses.
Contractors should review contract terms to see what the language says about delays and cost recovery. In particular, look at the force majeure clause to see if pandemics are included and what you are entitled to recover (it could be only an extension of the completion date, not necessarily added costs).
Bonus – Review your current standard contracts, if you have them, and make sure to add language related to recouping time and costs if there is another shutdown due to the pandemic. Also, if someone sends you a contract that doesn’t have this stipulation in it, push back to see if they’ll add it.
Higher material prices
Both materials and labor will cost more going forward. Lumber shortages have already caused price spikes, and material availability is expected to decline as backstock has been depleted. New supplies are slow in coming from other countries affected by the virus.
Also, some companies may raise prices in the future to help recover losses they experienced in 2020. As construction returns to a more normal level of activity, those companies that weathered the storm will have ground to make up to pay their bills and make their investors happy.
There’s also a labor shortage in the industry. According to an AGC survey published on September 2, 60% of GCs have already had future projects delayed or canceled due to limited labor.
Companies were having trouble recruiting before the pandemic. Now many employees, especially those with underlying conditions, are taking this event as an opportunity to take early retirement and get out of the industry.
Others may not feel safe working on specific projects or in certain circumstances. Without the labor necessary, project owners and contractors alike should expect delays — and change order requests to reflect the new schedule brought on by COVID-19.
Analyze productivity with new safety protocols in place
Productivity rates have also declined significantly. Projects will inevitably take longer to complete due to reduced manpower levels. Contractors need to reassess how they’re bidding and scheduling their projects, including added time for smaller crews and reduced manpower on projects.
Changes in response to COVID-19 could extend project timelines 25-50% depending on the scope of work and the amount of space the project is affecting. Longer schedules mean more costs. When prices increase, change orders follow.
Assess COVID-19 impacts to prepare change orders
GCs and subcontractors don’t necessarily have to eat the extra costs the pandemic has caused. Starting a conversation with clients regarding how to address these effects is the key to recouping your losses.
Assessing productivity measures and cost increases can provide a picture of the impact to each company. Preparing change orders to reflect the cost increases and productivity decline, externalities of the COVID-19 pandemic. Contractors may not recover everything they lost, but negotiating change orders can help get some of it.