Due to the pandemic’s strains on global supply chains and its impacts on consumer demand, the past year has seen a sharp increase in the cost of many construction materials. ASA friend, Lauren Scroggs, Construction Law Attorney at Andrews Myers, P.C., recently published the following tips on protecting your company from material price escalations.
Protecting Your Company from Material Price Escalation
Due to the pandemic’s strains on global supply chains and its impacts on consumer demand, the past year has seen a sharp increase in the cost of many construction materials. The Bureau of Labor Statistics’ producer price index—a metric for measuring US sales price changes—indicates that lumber and plywood prices have increased have increased 62% since April 2020. In the same period, diesel fuel has increased by 114% and steel mill products have increased by 20%. Depending on the terms of the upstream contract, these drastic increases could spell trouble for contractors.
Materials often constitute half (or more) of a job’s cost. When entering into a contract for a fixed-price without accounting for a substantial hike in materials costs, job profit is potentially wiped out or worse: the contractor may be forced to operate at a loss. It is crucial that contractors protect themselves against these situations.
For jobs that have already started, contractors should maintain an open line of communication with the upstream party regarding the material cost escalation and review contracts to determine if the change order provision will permit an increase to the contract sum. Even if the contract does not allow a change order for increased material costs, the upstream party may concede some costs in order to keep the job going and keep the affected contractor from going under.
For jobs that have not yet begun, the contractor should include in the contract a price escalation provision allowing the contractor to seek additional funds when the cost of materials escalate beyond a certain point. Alternatively, if circumstances permit, the contractor could buy and store the materials as soon the job is awarded to hedge against further price increases.