Protecting Yourself in a World of Rising Material Costs and Extensive Delays
The COVID-19 pandemic and recent economic monetary inflation trends have had a significant impact on the construction industry. Particularly, the supply chain is plagued with increasing materials costs and decreasing availability. Subcontractors now face varying material costs and delivery delays that impact their ability to stay within contracted deadlines and bid or contract prices. Contractors and subcontractors must consider how and to what extent a price escalation clause will be necessary in their contracts.
Best practices for contractors are to include a contract clause that specifies that an owner will be responsible for actual construction costs, in order to capture any price escalations. If the contractor has agreed to a fixed price contract with the owner, the contractor will typically then require a fixed price with the subcontractor as well. A fixed price subcontract with no provisions allowing for either schedule extensions due to supply chain delays or cost escalations for increased materials costs has the effect of placing project costs and potential exposure for liquidated damages or other delay related damages, on the subcontractor.
To avoid this outcome, during the bidding phase a subcontractor should obtain a copy of the Prime Contract to gain an understanding of the financing and budget for the project. To avoid issues or consequences for delay or increase in pricing, address these points during bidding and contract negotiations. The best way to do this is via specific terms in your contract. Different contract provisions allow the subcontractor to recover cost changes or account for schedule delays throughout a project.
There are different types of price escalation clauses. Some allow a subcontractor to seek reimbursement for any increase in price that occurs after signing of contract. Others allow for reimbursement if the material price increases by a certain percentage. Substitution clauses allow the subcontractor to cover unavailable or delayed materials to comply with the contracted deadline. Finally, delay clauses fix a price to a certain date allowing reimbursement if the delay extends past the scheduled project completion date. Delay clauses also allow for submission of change orders to account for the delay.
Subcontractors reviewing proposed contracts should be looking for and proposing revisions to clauses that have the effect of making subcontractors carry costs of delay or increases. Clauses to be aware of and propose revisions to include the following:
Clauses to avoid:
Contractor shall pay the sum herein set forth in current funds for such work and materials, and in the manner and at the time herein set forth. Such sum is intended to include all increases in cost, foreseen or unforeseen, including without limiting the generality of the foregoing, taxes, labor, materials, and transportation costs, all of which are to be borne solely by Subcontractor.
All loss or damage arising from any of the Work performed under this Agreement through unforeseen or unusual obstructions, difficulties or delays which may be encountered in the prosecution of the Work, or through the action of the elements, shall be borne by Subcontractor.
Any and all escalation costs applicable to all labor and materials necessary for the completion of this work throughout the end of the project are included.
Clauses to know and consider having in your bids or contracts:
Client acknowledges that markets are experiencing significant, industry-wide economic fluctuations impacting the price of materials to be supplied in conjunction with this agreement [and the Projects subject hereto]. If the cost of any given material increases in excess of 5% above the amount shown in the bid proposal for such material, then a Change Order shall be issued to increase the price commensurately with the increased actual materials cost.
Contractor agrees that if the work is delayed due to the timing of delivery, or the unavailability, of a material or product then a Change Order shall be issued to increase the completion time commensurately with such delay. In such an instance, Contractor and Owner waive and relinquish all related claims for consequential damages, liquidated damages, or business loss.
If a scheduled materials delivery is either canceled without re-schedule for a period of thirty days, or if the rescheduled delivery date is more than thirty days beyond original delivery dates, either Party may cancel this contract upon written notice to the other Party and no damages may be sought or assessed arising from such cancellation. In such an event, Contractor shall pay Subcontractor for all work performed and materials actually supplied prior to the date of cancellation.
The clauses outlined above are not an exhaustive list. Each contract should be individually reviewed and considered, to understand the risk and exposure that the contractor or subcontractor is undertaking and balanced with the contract value and other reasons to engage in the contract. If you have questions about escalation clauses or other contract terms and conditions, please contact us at Galvanize Law Group to schedule a free fifteen-minute consultation with a skilled Colorado business attorney.