Addressing Material Prices
Brian Perlberg Esq. CM-Lean
Posted: September 10, 2021 | Tradewinds
Material price escalation spikes and supply shortages threaten builders’ financial viability in today’s construction market. ConsensusDocs, the leader in standard construction contracts, has compiled resources below to address price escalation. The best approach is to include a price escalation provision, such as the ConsensusDocs 200.1 Material Price Escalation Amendment, in your construction agreement at contract signing.
A material price escalation clause adjusts the contract price based upon a certain metric, usually an objective index. Existing contracts that do not contain a price escalation provision can utilize a price escalation amendment if both parties agree. Choosing a reliable material price index that specifically and accurately addresses the prices involved on a particular project is one of the more difficult aspects of drafting a price escalation clause. The below resources now include some indexes that are available for construction.
Owners, Constructors, General Contractors, and Subcontractors alike should consider price escalation/deescalation clauses in these uncertain times. ConsensusDocs is the only publisher of a standard price escalation clause. The ConsensusDocs 200.1 Standard Time and Price Impacted Materials Addendum and Schedule A is available on all paid subscriptions.
“Rather than guessing to price out cost fluctuations, owners and builders would be wise to consider a best practice price escalation clause that is tied to an objective index agreed upon ahead of time that allows prices to go up or down. Hope and a contingency fund don’t qualify as a risk management strategy,” explains Brian Perlberg, Executive Director and Senior Counsel for ConsensusDocs.
Typically, constructors, subcontractors, and materials suppliers bear the risk for cost increases in a firm-fixed or lump sum agreement, even if such increases are unforeseen and not their fault. However, supply shortages could give rise to excusable performance delay, but paying higher costs for material supplies are usually considered a business risk.
Some additional mitigation strategies include the following:
• limiting the amount of time a bid can be relied upon;
• using cost of the work agreements (i.e. ConsensusDocs
230 or 500) rather than lump sum agreements (i.e. ConsensusDocs 205 or 751);
• breaking projects into phases;
• providing allowances or alternates for materials;
• early procurement and storage of materials (see the ConsensusDocs 750.1 Storage Rider);
• prefabrication (see ConsensusDocs 753 Prefab agreement);
• increasing contingency amounts to allow for material price increases.
If you’re ready to take the next step, let ConsensusDocs help you keep your company’s financial status healthy.
About the Author: Brian Perlberg Esq. CM-Lean is ConsensusDocs Executive Director & Senior Counsel. Mr. Perlman is a nationally recognized construction law attorney who is lead counsel for a unique, industry-wide coalition of leading construction associations producing best practice standard construction contracts.