From June 2020 to June 2021, the price of materials and services used in non-residential construction increased by 25.7%. During the same time, bid prices remained virtually stable, rising only 2.5%-3.4%. The inflation of material prices from May 2020 to June 2021 is wide-ranging, with the price of lumber and plywood increasing 111.9%, steel mill products increasing 85.9%, as well as copper and lead increasing 74.5%.

Price inflation has been caused by factors other than the COVID-19 pandemic and related supply chain disruptions, including an increased demand for construction, extreme winter weather and governmental trade policy actions. As a result, contractors and subcontractors are increasingly facing busted budgets and diminished profit margins. Who then bears the responsibility for these increased costs—the owner, contractor or subcontractors—and what can be done to shift the risk going forward?

As a general rule, a contractor or subcontractor performing a lump sum or fixed price contract bears the risk of price escalation. On the other hand, for projects constructed on a cost-plus or time and materials basis, the contract will likely identify the owner as the responsible party for increases in material costs. Guaranteed maximum price contracts fall somewhere in the middle of these contract delivery methods. For lump sum, fixed price or GMP contracts, contractors and subcontractors may attempt to rely upon force majeure clauses to justify a request for an increase in the contract price. However, the most common form construction contracts do not expressly provide for an increase in the contract price for force majeure events, but rather limit recovery to a non-compensable increase in time.

In the American Institute of Architect’s form A201-2017, contractors are permitted additional time for unusual delay in deliveries of materials, but not additional monies. Likewise, ConsensusDocs’s form 200 entitles contractors to additional time for any cause beyond the control of the constructor, which arguably includes delays in the deliveries of materials, but not additional monies. And, under the Design-Build Institute of America standard form of general conditions, design-builders are entitled to time for force majeure events but not additional monies. Even if the contract is a modified form, it is common for force majeure relief to be limited to extensions of time only.

Given that force majeure clauses are likely not a viable avenue for relief from increased material prices, and given that owners are increasingly pushing back on contractors’ and subcontractors’ requests for additional monies as a result of sharp price increases and material shortages, contractors and subcontractors have been left to figure out how best to protect themselves on projects going forward. The best way to mitigate risks associated with unforeseen and severe material cost volatility is to include an express price escalation provision in the contract to shift the risk to the project owner, who is arguably in the best and most appropriate position to bear the risk.

The federal government allows price escalation clauses in certain circumstances. Additionally, ConsensusDocs form 200.1 is an amendment that addresses material price escalations. Contractors and subcontractors can point to both to support their request to negotiate such a provision. If negotiating such a provision, contractors and subcontractors should carefully consider the type of escalation provision that is appropriate for their project.

There are two common types of escalation clauses, with the first based upon a “delay” or “event” and the second based upon a “baseline” or “threshold.”

For “delay” or “event” provisions, a contractor or subcontractor can typically seek additional compensation for increased material costs caused by a delay in material procurement of a certain duration. The following clause is an example:

If Contractor’s purchase of materials required to complete its Scope of Work is delayed because of (1) delayed notice of commencement for any reason whatsoever; (2) acts or omissions of the Owner, the Design Professional, or others; (3) changes in the Work or the sequencing of the Work ordered by the Owner, or arising from decisions of the Owner that impact the time of performance of the Work; (4) encountering Hazardous Materials, or concealed or unknown conditions; (5) delay authorized by the Owner pending dispute resolution or suspension by the Owner; or (6) force majeure events, including epidemics or pandemics, Owner shall execute a Change Order increasing the Contract Price in an amount commensurate with any actual, direct, and documented increase in material costs incurred as a direct result of such delays or events. Contractor’s fee shall not be increased as a result of such cost increases.

Meanwhile, “baseline” or “threshold” provisions provide a contractor or subcontractor with relief if the material prices on the open market have increased beyond what the contractor estimated at the time that the contract was signed. Typically, the parties negotiate a baseline price for the materials at the time of execution of the contract. The parties then agree upon an acceptable percentage increase in the cost of these materials before the owner becomes responsible for the costs. The ConsensusDocs 200.1 Amendment is an example of a “baseline” or “threshold” provision. Here is another example:

Contractor and its suppliers estimated the contract costs submitted in its bid/proposal to the Owner based on labor and material costs in existence at the time of the bid/proposal. Because Contractor’s work may not proceed immediately and the materials may not be ordered for months, Contractor cannot accurately predict or estimate increases in the cost of labor and materials that may occur prior to the Project beginning or during the progress of this Project. In the event the estimated cost of labor and/or materials included in the bid increase by 5% or more, Owner shall execute a Change Order increasing the Contract Price in an amount commensurate with any actual, direct, and documented increase in material costs incurred above the 5% threshold. Contractor’s fee shall not be increased as a result of such cost increases.

As with all such modifications to custom or standard form construction contracts, one should always seek the advice of a seasoned construction lawyer when drafting or negotiating such clauses.