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Believe it or not, it has been over a year and half since the pandemic started. Owners, contractors, subcontractors and suppliers in the construction industry have struggled, and continue to struggle, with the uncertainty and unpredictability of the pandemic. Keeping projects on track, maintaining business operations, and managing exposure in outstanding and future commitments is at the forefront of day-to-day operations and long-term planning.

Declaring an end to the turmoil is premature; however, project participants have learned to co-exist and direct greater energy into the common goals of timely, on-budget project completion. One of the main areas of uncertainty that still threatens this objective is accounting for volatile material prices. In an industry where margins can be tight, the issue of who bears the risk of cost increases is of critical importance. If project participants are willing to engage and work together toward completion of their common goal, the parties can mitigate this area of uncertainty and add predictability to project material prices by adding a few tools to their belts.

Stages of the Pandemic in Project Planning and Mitigation

While COVID-19’s impact on material prices was still unknown and distant, owners, contractors and suppliers focused on immediate obligations and commitments in an effort to remain viable. Force majeure was the hot topic for all parties to the construction process—owners faced project shutdowns, contractors faced labor shortages and suppliers stretched these contractual provisions in an attempt to mitigate against the unpredictable market. The sudden focus on force majeure resulted in improved drafting to add clarity and ensure enforceability of those contract provisions. In many parts of the country construction was ultimately deemed essential, so there were fewer direct construction schedule impacts than initially feared and invoking force majeure clauses to avoid or modify existing agreements became less urgent for many projects.

The early focus was simply survival and the completion of existing projects. As parties coped with difficulties of operating in a pandemic, survival gave way to the long term, unanticipated impacts that resulted from national and international shutdowns, stay-at-home orders, economic relief efforts and supply chain disruptions. It was impossible to predict how long the disruptions would last and how the stoppages would impact availability of materials. Economic stimulus packages, including direct payments and unemployment supplements, compounded the uncertainty and had a large impact on labor availability.



As major supply chain issues arose, scarcity became an immediate concern and materially prices began to increase exponentially. As a result, owners and contractors looked to enforce or avoid existing agreements not only for favorable, pre-pandemic pricing but also in a desperate attempt to maintain a claim on the limited materials available. At the same time, suppliers refused to guarantee pricing and often tried to avoid existing commitments that could impose company-threatening losses. Once the scope of the market issues was more widely known, on many projects there was a concerted, cooperative effort between owners, contractors and suppliers to ensure deliveries stayed close to schedule while adjusting or equitably allocating rising material prices and attempting to account for unpredictability and price increases and decreases in future agreements.

Unlike force majeure, where many of the best practices implemented during the pandemic remain, many of the high-risk habits and customs for material pricing were immediately reverted to as soon as the market showed a modicum of normalcy. The market is still far from certain or consistent, and instead of falling back into historical pricing mechanisms and contract provisions, price fluctuations should not fall back to being reactionary but planned for on the front end. 

Reevaluating Traditional Contract Pricing

Between owners and contractors, construction agreements typically used a fixed-price or guaranteed maximum price. In a fixed price contract, the contractor generally agrees at time of contracting to construct the project based on a specific set of plans and specifications for a fixed price stated in the contract. Similarly, when using a guaranteed maximum price, the contractor agrees at time of contracting to construct the project based on a specific set of plans and specifications for its cost plus a fee, and it guarantees its proposed price will not exceed a set amount.

Built into that fixed or guaranteed maximum price is a materials component that can greatly impact budget for an owner and profitability for a contractor. Under either approach the contractor typically assumes the risk of fluctuations in material prices and passes that risk to its subcontractors and suppliers. Most standard construction contracts, including the AIA contracts, do no not include a price escalation clause. Although standard contract pricing formats have not traditionally been a problem, they are becoming a regular point of contention as the risks grow too great to solely allocate to downstream parties.  

Related, although more direct, issues are seen in traditional subcontracts and material purchase orders between contractors and material suppliers where purchase prices are typically established through market-driven unit prices. In the pre-pandemic market, these agreements regularly contained agreements to hold pricing—without any avenue for adjustment—for six months, a year or even the life of a given project. These agreements, which were predicated on a stable, predictable market, were thrown into turmoil and became untenable when prices increased dramatically. Long-term pricing arrangements or commitments were simply no longer available in this unpredictable market.

Remaining Proactive in Material Pricing

Stretching force majeure and other contract provisions to try to encompass price fluctuation and requesting equitable adjustments despite a lack of contractual support are not viable long-term policies for success. Instead of agreeing to risky pricing provisions, owners, contractors, and suppliers should take a proactive, cooperative approach to avoid crisis caused by material prices and unmanageable commitments on projects. Open and straightforward communications regarding risks and abilities of each party to help mitigate risk are key. This issue should be considered and addressed before submitting a proposal and before signing a contract.

This can be accomplished a number of ways, but two that are gaining broad acceptance are:

  1. purchasing volatile and long lead-time materials up front; and
  2. drafting clear and fair price escalation clauses.

In an effort to further their objectives of timeliness and budget certainty, an increasing number of owners are allowing contractors to purchase materials up front and establish material costs at a known price point. Contract provisions allowing for pre-purchasing should clearly allocate responsibility for stored materials prior to incorporation into the project and should also address the potential for changes in scope that result in pre-purchased materials no longer being needed.

A carefully drafted price escalation clause can also manage material price fluctuations and allocate those risks in a sustainable way. While owners may be skeptical of a price escalation clause, such a clause may be more favorably viewed than a large contingency included in the contractor’s proposal. In addition, a price escalation clause can be drafted so that the owner receives the benefit of any decreases in the price of materials as well. With good communication and understanding of the issue, the parties can draft and negotiate an appropriate price escalation clause.

When using these contract provisions, a greater level of detail can improve certainty and assist implementation in the event of price fluctuations during a project. Some of the key details that should be considered for inclusion include:

  • the specific construction materials to which pricing adjustments will apply;
  • whether the clause should be made mutual by allowing price savings due to market price decreases to inure to the benefit of the owner;
  • what threshold must be reached to warrant an adjustment in contract sum or unit price; and
  • whether the adjustment will equal the entire price change, only changes above a set threshold, or up to a defined cap.

Whatever the details included in the provision, measurement of price fluctuations must be tied to an objective, agreed-on measurement such as catalog prices, actual material costs, material cost indices or established market prices.

As discussed above, timing is also critical. Price escalation clauses should be discussed and negotiated at the earliest stage possible. A supplier or subcontractor should propose a price escalation clause from the outset of contract negotiations to allow incorporation in any upstream negotiations and agreements. When used effectively, an owner in a volatile market will have mitigated the impact of an unpredictable market and the allocated risk of price fluctuations improve the certainty contractors and suppliers will adhere to their commitments and the project will be delivered as anticipated.

In addition to addressing equitable adjustments to the price, there is also a risk of delays in the delivery of volatile materials due to shortages or other demands. As such, the parties would be wise to address time extensions due to the potential for delivery delays to negatively impact the construction schedule. Here again, provisions for up front purchasing can mitigate risks to the project schedule.

Keeping the Tools Sharp

As the pandemic continues into a phase with more planning and less reactionary decision-making, there is still no one-size-fits-all solution to eliminate impacts of the materials market. This period of surviving and sustaining, however, has prompted the use of tools such as advance purchase and price escalation clauses to better achieve owners’ anticipated schedule and budget while avoiding the devastating impact of over allocating market risk to individual project participants. While we eagerly anticipate the materials market and construction industry returning to “normal,” returning to the old “normal” for contract pricing should be avoided and these tools should continue to be used proactively to promote predictability for owners and profitability for the contractors, subcontractors and suppliers delivering the project.

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