By Aaron S. Brotman of Cole Schotz P.C.
Published March 25, 2022
The COVID-19 pandemic has lasted two years, and while offices, projects, and the rest of life begin to return to pre-pandemic normal, the construction material supply chain and costs have not. In fact, it appears as though the impact on projects of material costs and delivery difficulties will be an issue going forward for the foreseeable future.
But do you know what will happen on your project if and when material prices increase? How are material delays dealt with? Even if these issues are specifically identified and accommodated for in the contract, the question remains to whether the contract is fair and reasonable or not –a reasonable contract will lead to a better project without delays, disruptions, and unwanted claims.
The standard form AIA contracts, which many in the construction industry use without second thought, fail to clearly and sufficiently account for these variables. For both price escalation and supply chain concerns, there is not a one-size-fits-all solution.
A good rule of thumb for allocating controllable risks is that the party that is in the best place to adjust and account for it should be the one to bear that risk. However, when dealing with supply chain disruptions and material price escalations, neither party is truly in a position to account for all of that risk. Therefore, the parties will need to determine before the project starts who can bear what risk, who can account for that risk, and what should the limit of that risk be.
When entering a construction contract now with a time horizon of more than a few months, and particularly one with long-lead deliverable materials, the parties need to ask themselves a number of questions, including:
- Can the owner or contractor mitigate the risk of price escalation or material delays in some way?
- What are the real costs of extended project duration?
- If the risks are to be shared, how should that risk be capped?
- Is there a reasonable assessment of the time and cost risks for material costs increases and supply chain delays? If so, can a fund be established with shared savings to incentivize timely and cost-effective completion?
- Are there alternate materials that can be provided for to complete the project? If so, how willing is the owner/developer/end use to accept these alternates?
It is also important to remember that, as we are all aware of the ongoing impact of COVID and the interconnected nature of the global supply chain where a single ship running aground can delay delivery of goods worldwide for weeks or the Russian invasion of Ukraine can increase the costs of on-site heating for concrete formwork, these risks may no longer be “unforeseen.” It is, therefore, inappropriate to simply rely on a force majeure clause to provide the contractor with any relief for material costs or supply impacts it did not account for.
Finally, while the instinct is to protect yourself as much as possible, and place all risk on the other party, balance and fairness must be considered. A contract that places all the risk on either the owner or the contractor will likely lead to more claims, project interruptions, and a worse experience for all – if you can get the other side to sign the contract in the first place.