Construction material costs are rising, at least that’s what AGC, ABC, ACEC, ENR and the government are saying. So, let’s assume that its true—construction material costs are rising. What can you, as a general contractor or subcontractor do about it? Not surprisingly, it all comes down to your contract and whether you included a cost escalation clause.
What is a Cost Escalation Clause?
These clauses are pretty self-explanatory in that they require an adjustment of the contract price to account for fluctuations in the costs of materials and labor. The goal is to shift the risk of cost increases from the contractor to the client.
What does an Escalation Clause look like?
Escalation clause must be carefully drafted because they will face serious scrutiny if you have to enforce it. Typical clauses may provide:
In the event of significant delay or price increases of materials, through no fault of the Contractor, the contract sum, time of performance, and contract requirements shall be equitably adjusted by change order in accordance with the procedures of the contract documents. A change in price of an item of material shall be considered significant when the price of an item increases ____ percent between the date of this contract and the date of installation.
How does an Escalation Clause impact a subcontractor?
If a general contractor is successful in negotiating an escalation clause in the prime contract, there are likely flow down provisions that will benefit a subcontractor. But, it is advisable to include a similar clause in a subcontract. These clauses typically state:
To the extent Contractor receives reimbursement or additional time from the Owner under the prime agreement, the Subcontract Amount or Progress Schedule shall be equitably adjusted.
Take Away: It is important to consider the impact of material and labor cost fluctuation when negotiating construction contracts before the construction contract is finalized, otherwise you may find yourself having to pay for those increases out of your pocket.