In a fixed price contract, price is usually a required term to have a “meeting of the minds”. Therefore, without a specific contract exclusion, the price is most likely firm, even when the cost of labor and materials increase due to shortages, supply chain issues or market conditions. These types of contracts are usually referred to as “lump sum” or “stipulated sum contracts”.

In comparison, a cost-plus contract with a guaranteed maximum price allows for some fluctuations in the price up to the guaranteed maximum price. If the contract has no guaranteed maximum price, then there are very few limitations on how much the price can vary. It is exceedingly rare to find subcontracts or sub-subcontracts in a cost-plus format.

Reliance on a “force majeure” provision to allow for a price increase may be misplaced. First, even if the contract has such a provision, it may be so narrowly drafted that it precludes any meaningful redress when prices fluctuate. Second, some contracts have no such provision or have provisions that state the opposite – that the price cannot be altered for any reason whatsoever.

An example of a “Price Escalation” clause is:

“The Contract Sum is and shall remain fixed. Under no circumstances whatsoever shall Contractor be entitled to any additional time, compensation, fees, costs or increases in the cost of materials, delivery, fuel, storage, or labor due to any reason including, without limitation, shortages, strikes, delays, pandemics, wars, viruses, or the like.”

That said, an “allowance” may permit a contracting party to seek additional compensation for that line item. An allowance is a “placeholder” amount for a schedule of values line item, for example $10,000 for bathroom vanities. If the price of that allowance item increases, then the additional cost may be passed on as a change order.

If it is suspected that prices may fluctuate significantly or that supply chain or market factors may delay or prevent deliveries of materials, having the right, or at least the opportunity, to adjust the contract price and contract time may be important.

An example is:

“Where and when the delivery of materials is delayed or quantities are limited as a result of shortages, rationing or unavailability, Subcontractor shall not be liable or responsible for any delays or damages caused thereby. Additionally, when the costs of any or all labor and materials exceed 5% more than the price originally quoted to Subcontractor, then Subcontractor shall notice Contractor in writing of such change and the parties shall promptly come to a mutual agreement on a new Contract Price. Subcontractor may slow or stop work prior to such agreement.”

However, if you are carrying a subcontractor’s price in your number, then precluding them from changing their price or schedule is likely critical. Getting and giving payment and performance bonds complicates this situation as sureties are typically bound by the applicable contract and could be exposed to a loss if contract obligations are not fulfilled, thereby putting the principal on the bond at risk.

We hope this helps you understand the construction contracting process a little better. If you have questions about your contract, send us an email or give us a call. And make sure to check out our other free tools and our weekly podcast.