Price Escalation, Spikes, and Shortages
Price escalation, price spikes, and supply shortages threaten builders’ financial viability in today’s construction market. As the leader of construction contract documents with an unprecedented coalition of leading construction organizations to draw upon, ConsensusDocs has compiled resources to address price escalation here, https://www.consensusdocs.org/price-escalation-clause/. On this website you’ll find good examples of federal and state government contracting documents that feature employee price escalation clauses, as well as references to industry standard construction contracts, and articles that delve into this topic and provide a variety of recommendations.
The best approach to protect yourself is to include price escalation provisions in your construction contract agreement at contract signing. But if both parties agree, you can use the ConsensusDocs 200.1 price escalation amendment after contract signing.
ConsensusDocs employ a threshold-price escalation clause in which there is a threshold identified materials increase or decrease in price before a price adjustment is made. Notice the reference to a decrease in price. Owners, especially now, also benefit from a price escalation clause — it avoids builders pricing in potentially inflated costs for spiking materials that should stabilize, if not even come down in price in the foreseeable future.
Owners, constructors, trade contractors and suppliers alike should consider price escalation/de-escalation 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 when pricing 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.
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 for excusable performance delay, but paying higher costs for material supplies are usually considered a business risk. Some additional mitigation strategies include 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 lumpsum 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); and prefabrication (see ConsensusDocs 753 Prefab agreement).
The most unfortunate aspect of recent sudden price increases is that many suppliers, builders, and owners, didn’t foresee them when signing their contracts. As with many things in construction contracts, parties often react strongly to such trends going forward — often in a protective manner rather than prospective — and more collaboratively. So expect to see a dramatic increase in usage of price escalation clauses and higher costs in the near term.
This won’t necessarily help parties dealing with an existing design-bid-build project with a firm-fixed price right now. Hopefully, the silver lining in today’s trends will be yet another exhibit taking a more collaborative, forward thinking, and flexible but clear approach to construction contracts, which makes for better project results.
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.