While COVID has made the past year wild and unpredictable, this summer could be even wilder with rapidly escalating material costs. Lumber prices have tripled, steel prices are through the roof and PVC has doubled. These increases can turn into real numbers on your projects and if you don’t have any protections in place, the project could turn ugly in a hurry. Now is the time to review your current contracts to see if there are any provisions you can rely on to increase your bid and start incorporating an escalation clause in your bid and future contracts.
Price Escalation Opportunities for existing Contracts
The good news is that more contracts are including escalation clauses. For example, Consensus Docs 200.1, allows the parties to establish a baseline price for specified volatile materials. If the price of the identified materials changes, the parties are entitled to an increase or decrease in the contract sum. Consensus Docs also offer an “Amendment No.1”, which provides for price adjustments for essential materials if a project is experiencing or is expected to experience significant, industry-wide economic fluctuation during the performance of the agreement.
You should also look at the timing of the contract and if it has been substantially delayed, there may be contract provisions that allow for adjustments to the contract sum.
If you are subject to a homegrown contract, such as those created by the large construction companies, you are well advised to review them very closely to see if there are any opportunities to provide notice of a change in circumstance and demand an adjustment of the contract sum.
Addressing Price Escalation on Future Projects
Going forward, price escalation should be considered early on in every project—from the bid to the contract.
When preparing bids, those materials that may be subject to price swings should be identified and discussed with the upstream contractor or owner. Be very careful about signing bidding requirements that place the risk of all price increases on the bidder. Instead, demand a price escalation clause be added to the bid to reflect your concerns. If the upstream contractor refuses to accept an escalation clause, you may seek to include an increased allowance or larger contingency to account for price increases. Finally, you may want to shorten the time frame your bid is open for acceptance.
Once you get past the bidding process, make sure your price escalation concerns are addressed in the contract. General contractors should be advocating for price escalation clauses in the contract with the owner, and similar clauses should be included in subcontracts. You can also propose that language be added to the construction contract. A typical escalation clause provides:
If, during the performance of this contract, the price of _______________significantly increases, through no fault of contractor, the contract sum shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding ____% from the date of contract signing. Such price increases shall be documented through quotes, invoices, or receipts. Where the delivery of _________ is delayed, through no fault of contractor, as a result of the shortage or unavailability, contractor shall not be liable for any additional costs or damages associated with such delay(s).
Material costs may stop rising in 2022, so now is the time to figure out how to deal with them on current and future projects. Look at your current contracts and negotiate favorable terms on your future contracts to recover increasing material costs. If you need help with your construction contract, we recommend you contact an experienced construction attorney.