The U.S. is experiencing dramatic cost escalation and material pricing pressures, both locally and abroad. Prices for lumber, brick, steel and aluminum have soared, and costs for cement and rebar may also be rising. Higher prices for copper have affected electrical wiring costs and availability. Orders for engineered wood products such as I-beams and flooring (both medium density fiber and engineered hardwood) are backed up for months due to price increases of 50 percent or more. The lattermost shortage is particularly acute for larger commercial projects.
In general, these cost increases will likely lead to more construction claims, downstream disputes, and delayed start dates as owners rethink project timing due to escalating bids. Costs are also being exacerbated by tariffs on imported lumber, steel and aluminum. Additionally, increasing material costs from China have created questions about shifting production costs and contracts from other areas of the world — possibly South America or Africa. Some commentators have questioned whether our country can domestically manufacture those materials or whether contractors should reconsider supply chains and restructure their contracts to account for cost escalation and material delays. These issues will obviously impact the construction industry nationwide.
Raw materials for projects are reaching double or triple standard prices, and random-length lumber futures have gained sevenfold from April 2020. In a “lump-sum” or “guaranteed maximum price” contract, the general contractor typically bears the risks associated with cost escalation and coordination with subcontractors or material suppliers. But contractors also typically have more lead time to request bids, analyze subcontractor submissions, and finalize their agreements with sub-tier contractors and suppliers. With the current construction landscape and soaring material costs, contractors of every tier must act quickly lest they incur greater costs for subcontractors and suppliers. The risks of acting quickly, then, similarly increase. Some material suppliers have canceled their bids or contracts due to the lack of materials; some have indicated delays of six months or more, quoting prices for materials (like engineered wood products) that will not ship until early 2022. In addition, announcements regarding price increases of 50 percent or more have caused parties to redesign or reconsider their materials (such as replacing engineered wood for dimensional lumber or steel), which leads to further price increases for those alternates. As another example, lumber companies might refuse a hard bid, opting instead for price-plus-fee agreements to distribute risk to the contractor or owner.
Indeed, allocating risk for cost increases can be difficult. Attorneys usually include cost-escalation provisions in contracts between owners and general contractors, or within sub-tier agreements between contractors and their suppliers. But interpretations of both force majeure clauses and payment provisions may create additional strain in the wake of such unprecedented cost escalation. Hence, the industry can expect an increase in claims and disputes over material prices and associated delays. Project participants might consider amending their contracts, incorporating new or modified cost-escalation provisions, or adding riders for adjustments to contract terms based on certain material cost increases (e.g. based on express percentage increases). Parties might also negotiate contract allowances for certain materials or incorporate cost-sharing for material price increases that exceed certain thresholds.
While the general contractor can usually protect against the expectation — or possibility — that costs will increase, the construction industry has not experienced such dramatic material cost increases in years. Those material cost increases, coupled with the already existing labor and housing shortages, will continue to impact the industry, domestically and abroad, for the foreseeable future. Such shortages could delay the start of new projects around the country and may trigger additional claims on projects that are currently underway.