Material Price Escalation
The cost of building materials has risen significantly this year. Who should bear this risk and how can the various parties to construction contracts mitigate this risk? Owners, contractors, subcontractors, and suppliers have historically taken divergent perspectives in the control of risk of material price increases on construction projects.
An Owner’s position is that prices are fixed once a contract is signed and that increases must be limited to signed change orders. Downstream contractors, subcontractors, and suppliers will contend that any unplanned event or condition that causes results in an increased cost is a basis for an extra.
A better approach is for all parties to recognize potential volatility in material price increases and negotiate a mutually acceptable price escalation clause. Factors in such approach should include an analysis of the following:
- Can specific materials be identified that will likely have short term volatile pricing?
- Can a common understanding be reached as to what constitutes volatile pricing (i.e., 5% over 30 days or 30% over 180 days)?
- Can materials be ordered at commencement of project and stored on-site or at approved off-site location until needed?
- Can use of a contingency line item be used for unexpected volatile pricing?
Owners, contractors, subcontractors, and suppliers should consider these issues when negotiating agreements. Price escalation is not likely to disappear soon. As with many issues, open and honest communication often is vital to a good working relationship and addressing this issue before a project begins may help avoid litigation on the back-end of a project.