The construction industry has been experiencing unprecedented volatility in material prices, material delays, and material unavailability, in part, because of supply chain disruptions caused by the COVID-19 pandemic. This has become a difficult issue, especially for subcontractors with lump-sum or fixed-price contracts, where the subcontractor’s pricing is locked-in at the outset and general contractors or owners are unlikely to voluntarily provide any cost relief when material prices escalate.
Absent a contractual provision to the contrary, the general rule is that the subcontractor bears the risk of increases to the price of materials in fixed-price contracts. There are, however, various strategies contractors can utilize, starting at the pre-contractual and pre-performance stages, to mitigate the consequences of material price escalation.
First, subcontractors should be sure to advocate for the inclusion of a material price escalation provision into their bid proposals and contracts. A “price escalation” clause entitles the subcontractor to an equitable adjustment to the contract price when material costs exceed a specified value. For example, consider the following contract language:
Recognizing that construction materials are sometimes subject to unusual price volatility due to conditions beyond the control of Subcontractor, the parties agree that should the price of materials specified for the Project increase by more than __% between the date of this Agreement and the time when the materials are to be purchased, Subcontractor shall be entitled to an equitable adjustment of the Contract Sum equal to the additional cost incurred by Subcontractor to obtain the material.
During the negotiation process, a general contractor may be more receptive to the idea of incorporating a price escalation provision into the contract if the provision accounts for both price increases and decreases. A reciprocal price escalation clause could add the following language:
Similarly, if the price of material decreases by more than __% between the date of this Agreement and the time when the materials are to be purchased, Subcontractor shall provide a credit equal to the reduction in purchase price.
As an alternative to a generalized price escalation clause, subcontractors could advocate for the inclusion of a COVID-19-specific provision into their bid proposals and contracts allowing for a reasonable time extension or a reasonable adjustment to the contract price for disruptions or delays caused by COVID-19. This force majeure-type provision could include the following language:
The parties acknowledge that the potential effects of the COVID-19 pandemic on the construction industry and the performance of construction projects are not yet fully known and are beyond the control of the parties. Understanding that the effects of the COVID-19 pandemic may adversely affect Subcontractor’s workforce, the supply chain for materials, and otherwise adversely impact Subcontractor’s ability to perform as planned, causing delays in the completion of Subcontractor’s work, the parties agree that delays resulting from the effects of COVID-19 are beyond the control of the parties, and if such delays occur, that Subcontractor shall be entitled to a reasonable extension of time and an equitable adjustment in the Contract Sum for the additional costs incurred by Subcontractor resulting from the COVID-19 pandemic.
For subcontractors who are already locked-in to contracts, relief from material price escalation is generally limited by the provisions of the contract. It is important that these subcontractors examine their subcontract to see if it includes a reciprocal “flow-down” clause or terms incorporating the prime contract and Contract Documents by reference. These provisions may, in effect, import favorable cost recovery language from upstream agreements, thereby making it pertinent that subcontractors thoroughly review the terms of the prime contract and Contract Documents.
For example, Article 8.3 of the AIA A201 generally excuses delayed performance caused by “unusual delay in deliveries … or other causes beyond the Contractor’s control,” and may even expressly allow for the recovery of delay damages. If subcontractors have rights under the prime contract’s General Conditions by way of flow down and/or incorporation by reference, these subcontractors may be able to use favorable language from upstream agreements to recover for material price escalation.
Subcontractors should also look closely at their contract’s change order and delay provisions to see whether additional costs for materials would constitute a “change in the work,” or to see whether they are entitled to additional money for delays due to causes “beyond the control” of the subcontractor. These provisions, if applicable, could act as avenues for relief from material price escalation.
Even without an express contractual remedy, subcontractors should document all additional costs they incur from material price increases by submitting timely change order requests to the general contractor. Those change order should include sufficient details in change order requests so that all rights are protected down the line. Ultimately, subcontractors must be proactive in managing material price increases through communications with the general contractor and compliance with contractual notice provisions.