Construction materials

The rising cost of building materials and its effect on the legal landscape

It’s no secret that the prices of building materials and equipment have skyrocketed. The costs of lumber, steel, copper, glass and PVC, for example, have increased dramatically since the start of the COVID-19 pandemic and thanks to the reopening of the global economy. There are indications that the prices of some commodities have increased by more than 100%. Fear and uncertainty abound. The sellers are unwilling or unable to sell their materials at lower prices. Homeowners have no desire (and perhaps no funding) to exceed their project budgets. And contractors and their sub-contractors are stuck in the middle of the resulting vortex.

Throughout the crisis, our firm’s construction lawyers have responded to different iterations of these two key questions: How can I minimize my company’s exposure to the risk of price increases on projects already underway? ? and how can I protect my business on projects that have not yet won awards?

Considerations for existing contracts

In the event of an escalation dispute, there are a few provisions common to construction contracts which are likely to be in the foreground: escalation of material prices, force majeure and modify orders.

Material price indexation clauses

Although less common in private and vertical construction projects, a material price indexation clause allows contracting parties to adjust the price based on an agreed metric or conditions. Such clauses are common in public projects such as highway construction where volatility in the prices of building materials (such as asphalt, fuel and cement) is expected. These clauses can help keep contractors’ bids closer to market prices, as contractors have less incentive to submit inflated price bids as a hedge against future price increases.

A hard escalation clause in a fixed price contract might look like this:

  • 8.7.1 Escalation clause. In the event of a significant delay or increase in the price of material, equipment or energy occurring during the execution of the contract without the contractor being responsible, the amount of the contract, the period of execution or the contract requirements will be adjusted equitably by change order in accordance with the procedures of the contract documents. A change in the price of an item of material, equipment or energy will be considered significant when the price of an item increases by 20% between the date of this Agreement and the date of installation. The amount of the increase will be capped at five percent (5%) of the price initially provided for the item.

Here, the provision allows for an increase in the contract price when the price of the material increases by at least 20% from an earlier date. In an effort to spread the risk more equitably between the entrepreneur and his client, this provision places the first 19% of a material price increase on the entrepreneur and places a cap on the amount of an allowable increase in the price. contract price.

Force majeure clauses

In the absence of a material price indexation clause, companies and their councils must consider whether the construction contract contains a force majeure clause. Force majeure is a French term which literally translates to “greater force”. These clauses are intended to capture uncontrollable events (for example, war, work stoppages, epidemics and extreme weather conditions) and traditionally limit the relief of a game to time extensions only.

The force majeure The clause in American Institute of Architects (AIA) General Conditions A201-2017 provides a classic example:

  • 8.3 Delays and extensions of time
  • 8.3.1 If the contractor is delayed at any time in the start or progress of the work by an act or negligence of the owner or the architect, an employee of one or a separate contractor; by orderly changes in work; by labor disputes, fire, unusual delay in deliveries, unavoidable losses, adverse weather conditions documented in accordance with section, or other causes beyond the control of the contractor; by time period authorized by the owner pending mediation and binding dispute resolution; or by other causes that the contractor asserts, and the architect determines, justify the delay, then the duration of the contract is extended for a reasonable period of time that the architect can determine.

Under this provision, remedying a contractor for unforeseeable supply issues would be limited to an extension of time. In the event of a price escalation crisis like the one ahead, additional delay can help homeowners and contractors overcome the impact of longer material delivery times (for example, avoiding an assessment of damages for late completion). However, additional time may be less useful if a contractor has already purchased the materials or if prices continue to rise after an extension has been granted.

Amendments to clauses

If the construction contract in question does not include a significant price indexation clause and does not offer monetary relief for force majeure events, then a dispute over price escalation is likely to center around the change order clause of the contract. A change order is a change in the scope of work of a contract that does not invalidate the rest of the terms of the contract. Depending on the nature of the change, change orders may include adjustments to the contract price (increase or decrease) or the lead time (increase or decrease).

In the absence of clear contract relief, contractors have requested and are likely to continue to request contract price adjustments as an order change due to the commercial impossibility of price increases. Homeowners and general contractors may have the right to require subcontractors to complete their work without repair.

In practice, however, homeowners and general contractors may be faced with the reality that large increases in material prices can bankrupt subcontractors and the replacement is unlikely to deliver materials at prices. lower anytime soon. In other words, for projects already underway, owners, general contractors, sub-contractors and suppliers can be advised to share the risk with each other in order to avoid losses, delays and losses. unnecessary legal fees.

Considerations for future projects

What about construction projects that have not yet been designed or awarded? The current crisis offers important lessons and reminders to members of the construction industry and the professionals who advise them. When it comes to the price of materials, there is a lot to consider:

  • What are the most common materials that need to be purchased for the project and how stable are their prices before construction contracts are negotiated? Identifying these materials during the tendering process and discussing them frankly with the owner can go a long way in avoiding disputes about escalating prices during and after the project.
  • Are there possibilities to buy some materials earlier and store them there? Purchasing materials early can give the owner and his construction team more certainty about the cost of construction and reduce the effect that supply chain uncertainty could have on the time and cost of construction. construction.
  • Could a “material price indexation clause” be beneficial? A significant price escalation clause allows contracting parties to adjust the price based on an agreed metric or conditions. Contractors can benefit from such a clause because it provides a mechanism to pay for unforeseen cost increases. In addition to incentivizing contractors to provide market prices, an indexation clause could also benefit homeowners if the provision is drafted to function as an economy clause (i.e. when the prices of materials decrease during the project). If material prices do not fluctuate during the course of the project, the allowance will not come into play.

The contractual mechanisms and considerations for allocating the risk of significant price fluctuations in construction contracts have been around for a long time. The soaring material prices that accompanied the COVID-19 pandemic is the latest reminder that while project stakeholders cannot foresee the unpredictable, there are ways to mitigate potential risks and disputes as soon as possible. the start of the process. Parties that discuss potential price increases early on and use the tools at their disposal to balance the extra expense are more likely to pursue projects and avoid costly disputes.

Daniel E. Fierstein is a construction partner at Cohen Seglias Pallas Greenhall & Furman, representing members of the industry across the country including owners / developers, general contractors / construction managers and commercial subcontractors. Fierstein helps clients deal with day-to-day issues taking into account costs, resources and the fact that suing a long-time client is a last resort; not a first. Contact him at [email protected] and 267-238-4765.

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