Cost Overruns and Material Shortages: The New World Order in Construction

by | May 25, 2021 | Contracts

cost over runWe’ve all noticed that the price of just about everything has gone up in the last year. And if that isn’t bad enough, obtaining many of the materials needed in construction has gotten very difficult. This combination of price escalation and material shortages is significantly disrupting a contractor’s ability to properly price and timely build any project.

But contractors are not without some remedy. They can attempt to address these issues either during the negotiation and bid process or once construction has commenced.

It is obviously easier to attend to such matters before a contract is actually signed. Look to strike any proposed language which has you absorbing the risk and exposure of a price escalation. Rather seek to incorporate the right to adjust the pricing on the job, passing on any unexpected increases, maybe through a change order. Alert your suppliers, advising them you need guaranteed pricing for some extended period and you need written notice significantly in advance of any anticipated increase in pricing or any delay in delivery. You might want to add a provision similar to the following:

Where 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. When this occurs, subcontractor shall propose substitute or alternate means of acquiring said materials and contractor and subcontractor shall negotiate an equitable price adjustment to their contract. When the costs of any material exceed 25% more than the documentable price originally quoted by subcontractor, then subcontractor shall notice contractor in writing of such change and the parties shall come to a mutual agreement on a new price. This provision shall control over all other terms and conditions in this agreement and contract documents.

If you’ve already entered into a contract, it will surely be more difficult to address these issues. But depending on how the contract is written, an equitable adjustment in both time and price may still be achieved through the exercise of certain existing contract provisions, such as a Force Majeure clause, noting circumstances beyond your control entitle you to some modicum of relief. Pushed to honor your original pricing, you likely will be unable to complete the work – something neither the contractor nor the owner would want to see happen as this will undoubtedly delay the progress of the project and cost them both more than the reasonable price increase you would be quoting. A good faith renegotiation should be attempted.

Be proactive – approach each ongoing and new job with these points in mind.

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