Construction Equipment Guide stated that the construction industry is having to manage unusually high and rising materials costs, a significant supply-chain bottleneck and decreasing demand for projects. In “Facing, Recovering From Economic Perfect Storm,” construction and real estate litigation partner Carl Pebworth and associate Rachael Stack discuss the potential effect on the contractor community and how to navigate these challenges.
Overall, communication is key, said Pebworth and Stack. It’s crucial for owners, contractors and other “downstream” construction partners to contemplate and address concerns from the beginning, they noted. “With respect to material price increases, it may be as simple as the parties recognizing potential volatility and negotiate a mutually acceptable price escalation clause.”
This approach, Pebworth and Stack explained, should include identifying specific materials or material categories that may be at risk for significant volatility. “If possible, identify suppliers for ‘at-risk’ materials that will provide fixed pricing for a fixed period of time.”
Construction Equipment Guide reported that in an article for JD Supra, Pebworth and Stack suggested defining volatile pricing and pre-ordering materials when it’s feasible. They also recommended accounting for storage costs and anticipating the potential impact for future projects under current conditions.
Further, Pebworth and Stack recommended discussing the use of a contingency line item for raw materials and consider bilateral flexibility. “If the owner shares the risk of price increases, then the owner should also share the benefit if prices come down unexpectedly,” they said. “Unanticipated material delivery delays and product shortages will require similar flexibility. A shortage of material transportation resources may be a long-lasting outcome in the post-pandemic construction economy.”
At negotiation time, owners, contractors, subcontractors and suppliers need to consider all these issues in the wake of COVID-19 and other unanticipated events that have occurred over the past year, Pebworth and Stack said. Further, price volatility and related delivery delays of construction materials will likely remain for the foreseeable future.
“As with many issues, open and honest communication during contract negotiations surrounding issues that may arise on a project not only fosters a good working relationship, but it can also avoid unnecessary costs, delays and disputes on the back end of a project,” Pebworth and Stack added.