Strategic Measures for Material Price Escalation
Increased costs for construction materials and equipment are impacting construction projects throughout the nation. Construction contracts often do not address material price escalation which creates risks for contractors, subcontractors, and suppliers. Therefore, it is important to understand how to protect against price escalation impacts by incorporating specific contract provisions, when possible, and preparing necessary documentation to support a claim for reimbursement for price escalation.
The key to successfully securing the approval of a change order for material price escalation is going to be based on two primary factors: (1) whether there is any language in the contract or general conditions that support such a claim; and (2) your back-up documentation as it pertains to original cost, escalated cost, and actions taken by you to secure the material at the earliest possible date and at the best cost. The basic entitlement is going to be based on the contract clauses and the extenuating circumstances. The quantification of the claim is going to be based on the documentation and a number of additional factors.
Price Escalation To-Do List
Documentation to back-up a price escalation claim is critical. The first thing that will be reviewed is what was originally part of the bid or proposal, the factors giving rise to the escalation and whether or not the material in question could have been purchased at an earlier date to mitigate any price increases. Other factors that will be considered include the expected duration of the project in relation to the time frame for the scope of work, whether the project was delayed pushing back the date of performance, actions by the owner or others that precluded your ability to purchase the material earlier, whether the material was reasonably commercially available and whether supply chain issues impacted your ability to secure the material. To that end, if you experience a price escalation impact, it is important to comply with the notice provisions of the contract and track your actual time and damages by doing the following:
- Keep detailed records of all increased expenses and provide supporting documentation required to obtain payment;
- Track your material costs to establish the increased cost in comparison with the amount at bid; and
- Meet the contractual requirements supporting a change order for the increased costs or time due to the delay.
- Secure letters from your material suppliers as to when material price increases may be imposed and/or delivery is delayed. Use these letters and forward them to whomever you have contracted with in order to create a paper trail. If supply chain issues become critical, then be prepared to propose alternative solutions which, if rejected, would bolster your claim.
- To the extent that there are delays in the project or necessary approvals that would allow you to order materials, send emails, letters and/or make sure that impacts are recorded in meeting minutes to create a paper trail noting that your costs may be impacted. To that same end, make sure that your submittals are submitted timely.
Contract Protection - Escalation Clauses
It is recommended that you review all contracts for the presence of an Escalation Clause. An Escalation Clause will compensate you in the event there are increases in the cost of raw material or equipment and include the following language:
- Material prices, including construction materials, are based on current prices at the time of the Proposal.
- Significant price increases (meaning a price increase exceeding (10%) in materials necessary to perform the work, that occur during the period of time between the date of this Proposal and Substantial Completion of the Project, shall cause the contract price to be equitably adjusted by an amount reasonably necessary to cover any increase.
- If material or equipment required by the contract are not available due to shortage or unavailability or if the price to procure such material or equipment increases as set forth in this provision, then an acceptable substitute shall be found and an adjustment in the contract price shall be made accordingly.
- Contractor shall be entitled to an extension of time for any delay in obtaining delivery of the item necessary for completion of the Work.
If a contract does not include an escalation provision, it is recommended that you revise the contract and include one, to the extent such contract is negotiable. You should also review the Prime Contract to see if escalation has been addressed. If so, the owner and the contractor should not object to including an escalation provision in downstream contracts.
It is generally recognized that to be competitive in today’s market, contractors try to run their operations lean by not maintaining large inventories of materials until immediately before they are needed. If you cannot secure the addition of a price escalation clause, then an option in lieu of, or in addition to, an escalation clause is to make sure that there is contract language that allows you to receive payment for material purchased and stored, onsite or offsite, prior to their installation.
Negotiating Contracts During High Inflation
It is important to be proactive and incorporate systems to protect your supply of raw materials and equipment used on a project. Make sure to negotiate for release of funds to make early purchases when necessary. This is critical so that you can negotiate contracts that will enable you to purchase materials in advance to avoid impacts caused by price increases or product unavailability. Furthermore, you can also confirm product lead times in advance of project needs, put a hold on material verified to be in stock, make purchases early when feasible, and obtain guarantees from your suppliers.
Whether you will be able to secure reimbursement for a price escalation on a given project is going to be based on a number of factors. The inclusion of contract language to support entitlement is critical, but almost as critical is the supporting documentation noted above to prove the quantification of the claim. Each claim will be fact specific so be mindful to create a detailed paper-trail to support your claim.
If you have any questions regarding this alert, please contact the authors or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo.