Greenberg Vogt
In 2020, COVID-19 imposed a price hike on construction materials, driving up project costs. According to the Associated General Contractors of America in 2021, the price of building materials jumped nearly 20%. This was on top of a 13% increase in construction materials prices during the pandemic’s first year.
Contractors and project managers have been negatively impacted by long delays due to supply chain setbacks as well as logistics jams and labor shortages. Pricing and supply of materials can be affected by geopolitical instability as well as tariffs.
These factors raised legal concerns for both contractors and owners of construction projects regarding who should shoulder the increased costs and delays. It is not surprising that both parties desire the same thing. The other party must take on the risk of rising construction costs.
Project owners are faced with real budgetary pressures, despite rising costs.
An owner who is involved in a single construction project will be more likely to push the contractor to take on the risk than someone who has had a long-standing relationship over multiple projects. The latter is more concerned about maintaining a healthy relationship with the contractor in the future and preserving its reputation among contractors. However, the stress of the labor shortage could prompt project owners to be more sensible in assigning risk. Or, they may face the real possibility of the contractor walking away from the job, rather than completing a financially disastrous project.
How can each party protect their project, their budget, or their business from post-COVID uncertainties that they can’t control? Who bears the risk?
Options and protection
These are some practices and contractual provisions contractors use to protect themselves from the negative effects of drastic price increases in materials and labor during the project’s lifetime.
- Contracts now include language in the force majeure clause that covers government-mandated shutdowns, pandemics, and health emergencies. This clause covers delays caused by events beyond the contractor’s control.
- You can stipulate that the bid price is only valid for a certain period of time.
- Some contractors inflate their estimates to account for a possible increase in materials prices due to serious delays.
- The contractor may also raise the contingency line item to protect itself from rising costs.
- Include an escalation clause which requires that the owner pays any additional amount if the costs rise beyond a certain percentage during the project.
- For claims to recover increased costs and loss of profitability, based on the doctrines o ne vs. performance or frustration of intentthese doctrines recognize that unforeseen circumstances may justify increasing contract prices or cancelling it.
- It is best to delay estimating material costs until they are actually ordered, so that the owner can bear any price increases.
- Include language that allows for equitable adjustments, such as time extensions or increases in contract pricing in case of delays and cost inflation. This will ensure that both the contractor and owner share the consequences equally.
In the meantime, project owners can ask their contractor to:
- To protect against price increases, pre-purchase materials. This may mean that the owner must lay out the funds and make final choices earlier in the construction process.
- To guarantee availability and pricing, lock in subcontractors and suppliers early in the process.
- To get the best price, you should solicit multiple proposals from subcontractors. The contractor used to prefer subcontractors from past projects before COVID.
- Even if the project isn’t a public one, you must provide payment and performance guarantees. This protects the owner from the contractor’s inability to perform.
Owners and contractors must work together to complete a project. Project owners need to be flexible and ready for price increases. This includes sharing costs, agreeing to use cheaper materials, and making design changes.
Owners and contractors should keep in mind long-term relationships and can explore cost-sharing options together. They should also cooperate with respect for equitable time and pricing adjustments. This way, everyone works together to ensure the project is completed on time, within budget, according to plan.
Jacqueline Greenberg Vogt chairs the Construction Law Practice at Mandelbaum Barrett PC in Roseland.
