By Timothy D. Boldt of Ernstrom & Dreste LLP
Published Fall 2021
Despite progress in the management of COVID-19 impacts, the magnitude of price escalation risks in the construction industry is critically high in the second half of 2021. According to a June report by the Associated General Contractors of America, the price of all materials and services used in construction rose at least 24.3 percent between May 2020 and May 2021. This figure does not reflect the continuing upward trend in pricing or the difficulties in securing delivery.1 For example, according to a July 14, 2021 Report by Associated Builders and Contractors, an analysis of Producer Price Index data released by the U.S. Bureau of Labor Statistics showed nonresidential construction input prices increased an additional 2.9% between June and July 2021.2 Unfortunately, volatility of construction material pricing is expected to continue, and with no end in sight.
Does your contract help you with this challenge? It may, but be aware of its likely limitations and the need for proactive negotiation and collaboration. In general, absent contrary contract language, the contractor bears the risk of material price escalation. When a contractor has bound itself to provide labor and materials for a set price, a court will not easily relieve the contractor of the bargain it made. The contractor can argue that its performance is rendered impossible or commercially impracticable by the price escalation, but these are difficult to demonstrate, particularly when the issue is not material shortage but price escalation. The best protection is to specifically address material price escalation in the contract – if you can.
Price Escalation Provisions
None of the standard industry form General Conditions (AIA, EJCDC or ConsensusDocs) provide a clear path to additional compensation for unexpected material price escalations, nor do they contain price escalation clauses.
For new contracts, consider seeking modification to the underlying general conditions, or adding other specific cost/price provisions. ConsensusDocs offers a standard form amendment that allows parties to address price volatility within the context of lump sum contracts. Known as “Amendment No. 1 Potentially Time and Price Impacted Materials,” it offers a thoughtful and thorough foundation for price escalation terms. It could provide a model for modification or amendment to other industry form contracts, if the owner is amenable. These are unusual times. If you identify significant price volatility for required material, make the case for a flexible approach to price escalation. For existing contracts without price escalation provisions, other contract provisions could provide only some small hope.
Force Majeure Provisions
Force majeure provisions typically permit schedule relief for unanticipated events that are beyond the control of the contractor. They do not usually provide price or other monetary relief, as shown by the force majeure terms used by both ConsensusDocs3 and EJCDC.4 The ConsensusDocs term is broad, including “epidemics” and “adverse governmental actions” as force majeure events that trigger schedule relief. The American Institute of Architects General Conditions do not contain a traditional force majeure term, but provide an avenue for schedule relief in situations where the contractor asserts that a delay is justified and the architect agrees.5 Thus, such provisions may work where the contractor faces delay in obtaining necessary materials, but likely will not help with higher material costs.
Equitable Adjustment Provisions
You may think unexpected, significant price escalation would support an equitable adjustment. All three of the standard form General Conditions discussed here include terms that allow contractors to seek additional compensation from an owner based upon principles of fairness.6 But these are typically tailored for scenarios that involve unexpected changes to the work itself, or some other aspect of construction that is caused by the owner or some other party, not by market forces or even a pandemic.
Other Options
If a contractor cannot secure contract language addressing price escalation, then other options should be explored. The risk of material price escalation can be incorporated into the contract price, but that is difficult to quantify with any certainty and a contractor might price itself out of a project. A contractor might get an owner to agree to employ an allowance to address potential price increases. Pre-purchasing potentially volatilely price materials could also be an option, with the owner’s agreement on the pre-payment and stored materials. Value engineering might also identify alternative materials not impacted by serious price escalation. Overall, educating the owner about the risks created by potentially time and price impacted materials is the best first step.
A full contract review will help determine what options could be available to address unexpected price escalations through a change order request, as well as procedures that must be followed to preserve potential claims rights. Document the price changes experienced and make the upstream party aware as required by the contract.
Open Communication and Good Faith Collaboration
The best projects are those where the owner and contractor engage in open communication and collaborate to progress a project to completion, and that includes when a project faces unexpected price changes and supply delays. These conditions are a problem for the owner and contractor alike. Owners choosing to enforce severe inequities are more likely to experience work stoppages, financially strained or bankrupted contractors, unfinished projects, and ultimately higher costs. It is thus in both parties’ best interest to address the challenges early, even pre-bid. Research and discuss particularly volatile material pricing and explore the possibility of price escalation terms, alternate materials, or other changes that could avoid the problem.
1 Construction Inflation Alert, AGC The Construction Association [June 2021]).
2 https://www.abc.org/News-Media/NewsReleases/entryid/18873/construction-input-prices-rise-2-8-in-june-says-abc.
3 ConsensusDocs 200, Section 6.3 Delays and Extensions of Time.
4 EJCDC 700, Section 4.05(C).
5 AIA A201 2017 Section 8.3.1.
6 E.g. See AIA A201, Article 15; EJCDC C 700, Article 4; ConsensusDocs 200 Article 8.
Timothy D. Boldt is a Partner with Ernstrom & Dreste LLP. He is an experienced litigator and counselor, focusing on the unique needs of sureties, contractors, subcontractors, and construction managers. He can be reached at tboldt@ed-llp.com or 585.473.3100.
