Some contracts include a significant price scale clause that allows the parties to adjust the price based on an agreed measure. The measure could be, for example, the difference between the price indicated at the time of submission of the offer and the price of the material on delivery if the price change exceeds an agreed threshold. This provision can also serve as a savings clause if material prices exceed a certain threshold, which can be a useful incentive to facilitate the inclusion of an escalation clause in your contracts. Here are some examples of material price scale clauses included in contracts: One way contractors can make the idea of an escalation clause more appealing to homeowners, Felsen says, is to offer joint savings or another benefit when material prices drop. In addition, these provisions do not have to cover all materials. It is appropriate, he said, to include those with the greatest cost concerns. ”It doesn`t have to be in one direction,” he said. Thus, the owner is likely to pay at least part of the price increases of the materials through inflated offers, whether or not he accepts an escalation clause. And if there is no price increase in the end, the owner could end up paying more by not accepting a climbing provision. Once a contract is concluded, there is usually little that can be done to modify the document in order to cope with rising prices.
Efforts must therefore be directed towards future protection. The best technique to deal with future rising prices for building materials is to add a price escalation clause to contracts and subcontracts. While this is not useful for past contracts or subcontracts, it can certainly provide important protection for the future. Emergency funds could also be set up to pay for material price increases, Kellogg said, but he usually sees the issue addressed in stand-alone clauses. However, if the project has an emergency fund, the owner may require the contractor to first take the price increases for the materials in that silver pool and then cover the additional costs through an escalation clause. ”You don`t often see it on smaller projects,” Kellogg said, ”mainly because these entrepreneurs don`t have the sophistication, the means, or the leverage to get that kind of deployment from the owner.” Ferrous and non-ferrous metal prices have risen significantly over the past year, for the same reasons: scarcity. When using a contractual clause such as the following, it is important to adapt the language to the rest of the contractual document. The terms used in the example are ”contractor” and ”customer”.
It could just as easily be ”subcontractor” and ”contractor” or ”contractor” and ”owner”. The fact is that it is necessary to use terms that coincide with the rest of the contract or subcontracting document in which they are used. Here are the options to consider: Note that it is common for force majeure relief to be limited to time extensions only. If this is the case, you can apply for an extension of time that can help you cope with extended delays related to materials, but you are not entitled to financial relief for price scaling. While the specific events that lead to these impacts are new and unique, the way your contracts and contract law treat them is not new. Think about force majeure, essential escalation clauses, and appropriate adjustments/change orders. While no one wants to return to a customer for an increase in material costs during a project, sometimes this is both necessary and justified. There are ways to ask for relief without alienating your customer or straining the relationship, including: As with many contractual terms, price scale clauses can be very nuanced and even regulated by law. Be careful with implementation and consider contacting a lawyer during development or negotiation. More common is a price scale clause that is triggered by certain delays that are not caused by the party trying to apply the clause.
Delays can be natural disasters, acts or omissions caused by other contractors or the project owner, pandemics, etc. The provisions may require that the delay last for a certain period of time, or they may simply allow a party to claim increases, regardless of the length of the delay, as long as the delay causes the increase. Whether you`re following financial headlines or checking recent delivery invoices, one thing is clear: material costs are rising and are far from slowing down as the rate continues to accelerate. Contractors are under increasing pressure to provide the price of materials high enough to cover rising costs, but low enough to remain competitive. The pressure becomes intense. The prices of building materials are sometimes unknown when planning a project. Whether it`s tariffs, supply chain concerns, or a volatile commodity market, there can be fluctuations that can affect outcomes for owners and entrepreneurs. For example, the price of precast concrete rose 4.4 percent from September 2018 to September 2019, the price of cement rose 2.2 percent, and the price of construction equipment and machinery also rose 2.2 percent, according to Data from the Bureau of Labor Statistics compiled by Ken Simonson, chief economist at the Associated General Contractors of America. However, if the owner does not plan to include an escalation clause in their agreement with the general contractor, the bids are likely to be inflated to cover potential increases, and this goes through the project hierarchy. Daniel Felsen, an attorney and shareholder at Washington, D.C law firm Carlton Fields, said many public and private owners were willing to negotiate escalation clauses, but those provisions were more likely to apply to large private construction projects.
”These clauses really deal with how the parties decide to spread the risk,” he said. ”When the prices of materials go up, someone has to pay for it.” Contracts for long projects are also more likely to include escalation provisions, said attorney James Carney, also at Carlton Fields, because it`s harder for contractors to predict how material prices will change in the long run. For existing projects, review your contracts to see what, if any, says about force majeure, material escalation, and changes. Traditionally, a force majeure clause excuses a contractor`s performance for catastrophic or otherwise unforeseen events identified in the contract, such as. B extreme weather conditions, wars, strikes and changes in the law that would make enforcement impossible. A well-worded force majeure clause will make this clear: even if general contractors outsource most of the work to specialized labor- and material-intensive companies and pass on the risk of higher prices to the chain, these subcontractors are likely to add premiums to their own proposals. Subcontractors then always try to secure prices from their own material suppliers for as long as possible and delay the risk again. .