Monthly Archives: August 2022

No Coverage for Repairs Made Before Suit Filed

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Tred R. Eyerly | Insurance Law Hawaii

    After a hurricane damaged the building the insured was constructing, there was no coverage under the CGL policy for repairs the insured made in the absence of a suit being filed. Planet Construction J2911 LLC. v. Gemini Ins. Co., 2022 U.S. Dist. LEXIS 105468 (W.D. La. June 13, 2022). 

    Planet Construction was a general contractor hired to build a fitness club. On August 27, 2020, Hurricane Laura struck the area. After the storm, a pipe in the sprinkler system broke, allegedly due to faulty materials and workmanship by a subcontractor, S&S Sprinkler. Planet Construction sought coverage under its policy with Gemini as well as under S&S’s policy with Zurich. Both insurers denied coverage and Planet Construction filed suit.

    Gemini moved to dismiss. The Court noted coverage would only be triggered if the building owner held Planet Construction liable for the sprinkler failure, but no suit was ever filed. Even though Planet Construction’s remediation and repair efforts likely averted a breach of contract claim by the building owner, the court could not expand coverage under the policy to cover proactive measures. 

    Accordingly, Gemini’s motion was granted.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

In All Fairness: Illinois Appellate Court Finds That Arbitration Clause in a Residential Construction Contract Was Unconscionable and Unenforceable

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Gus Sara | Subrogation Strategist

In Bain v. Airoom, LLC, No. 1-21-001, 2022 Ill. App. LEXIS 241, the Appellate Court of Illinois (Appellate Court) considered whether the lower court erred in enforcing an arbitration clause in a construction contract between the parties and, as a result, dismissing the plaintiff’s lawsuit. The Appellate Court found that even if the arbitration clause was enforceable, the appropriate action would have been for the court to stay the lawsuit, as opposed to dismissing the case entirely. The Appellate Court then considered the language of the arbitration clause and found that several provisions were substantively unconscionable, which rendered the entire arbitration clause unenforceable. The Appellate Court reversed the lower court’s decision compelling arbitration and reinstated the plaintiff’s complaint.

In 2018, the plaintiff, Ms. Bain, a disabled senior citizen, hired the defendant, Airoom, LLC (Airoom), to renovate her home. Airoom provided its “Cash Sales Contract,” which included a binding arbitration clause. The clause required that any dispute arising or relating to the contract be resolved by binding arbitration through the American Arbitration Association (AAA), using the Construction Industry Arbitration Rules and Mediation Procedures (Construction Industry Rules).

Ms. Bain eventually filed a lawsuit against Airoom, alleging that Airoom grossly overcharged her and failed to perform the renovation work properly and in a timely manner. Ms. Bain’s complaint alleged breach of contract, breach of the impliedly warranty of reasonable workmanship and materials, and violations of Illinois’ Consumer Fraud and Deceptive Business Practices Act. Ms. Bain alleged damages in excess of $180,000, and also sought punitive damages and attorney’s fees.

Airoom filed a motion to compel arbitration, arguing that the contract mandated binding arbitration through AAA. Ms. Bain opposed the motion on the grounds that the agreement was procedurally unconscionable because she had substantially less bargaining power than Airoom and was not given a reasonable opportunity to understand the agreement before signing it. She also claimed that Airloom’s representative bombarded her with several documents, including schedules and specifications, and required her to sign 48 pages, which overwhelmed her. Further, she claimed that the Airoom representative did not explain the arbitration agreement to her and did not mention that signing the contract would waive her right to a jury trial. In addition, Ms. Bain argued that the arbitration clause was substantively unconscionable because solely Airoom chose the forum and the arbitration provision precluded punitive damages, provided costs for the prevailing party, precluded an award for attorney’s fees, prohibited the arbitrator from reaching any finding contrary to the express terms of the contract, and contained a strict confidentiality clause. Ms. Bain also argued that the requirement to arbitrate with AAA using the Construction Industry Rules would be too costly for her to afford to seek arbitration. She estimated that it would cost her over $13,000 just for the opportunity to have her case heard.

Airoom argued that its arbitration agreement was a standard arbitration agreement found in contracts signed every day and that the clause complied with Illinois’ Home Repair and Remodeling Act. Airoom also argued that if the court found any portion of the agreement improper, that portion could be severed but the agreement itself would remain enforceable.

The lower court agreed with Ms. Bain that the provision waiving punitive damages was unenforceable under Illinois law. However, the court found the rest of the arbitration clause to be enforceable. The court found that under Illinois law, the plaintiff was required to show that the arbitration clause was both procedurally and substantively unconscionable and that Ms. Bain failed to do so. The lower court concluded that the arbitration clause was not procedurally unconscionable because the terms were clearly expressed, and Ms. Bain had the opportunity to object to the terms. The court was not persuaded by Ms. Bain’s claim that she lacked bargaining power or meaningful choice on whether to agree to the clause. The lower court granted the motion to compel arbitration. The court also dismissed the complaint entirely on grounds that all of Ms. Bain’s claims arose out of the contract. Ms. Bain filed an appeal with the Appellate Court.

The Appellate Court found that the lower court erred in requiring the plaintiff to show that the clause was both procedurally and substantively unconscionable. The Appellate Court explained that such approach was outdated and that the new standard was that the plaintiff need only show that the arbitration clause was either procedurally or substantively unconscionable, but not necessarily both. The court noted, however, that the procedural aspect of how a contract was entered can also be considered when determining if the contract is substantively unconscionable.

The Appellate Court focused primarily on the substantive provisions of the arbitration clause, finding several provisions to be unconscionable. In addition to the provision prohibiting punitive damages, the court found that the prohibition on attorney’s fees was improper because the Consumer Fraud Act allows for an award of attorney’s fees. Further, the court found the confidentiality provision to be unfair because while it applies to both parties, such a provision would put Airoom in an advantageous position since they would have knowledge and information from past proceedings that the individual homeowner would lack.

The Appellate Court also took issue with the provision requiring that the arbitration be conducted by the AAA under the Construction Industry Rules. The court found that those rules and procedures appeared to be designed for complex construction disputes and were quite costly to navigate. Also, the details of these rules were not disclosed in the contract, and the mere inclusion of AAA’s main website was insufficient. The court also noted that the fees and rates for AAA using the Construction Industry Rules are excessive for homeowners, particularly in light of the fact that the AAA has a different, cheaper set of rules, the Home Construction Arbitration Rules and Mediation Procedures (Home Construction Rules), designed to make the resolution of home remodeling disputes streamlined and affordable. The existence of the Home Construction Rules was not disclosed in Airoom’s contract.

The Appellate Court acknowledged that the contract included a severability clause, and that Illinois law allows a court to modify a contract so that it comports with the law, but ultimately found that there are too many unconscionable provisions in the arbitration clause to modify the clause. Thus, the Appellate Court found the entire clause to be unenforceable. The Appellate Court reversed the lower court’s decision and reinstated the insured’s lawsuit.

The Airoom case reminds us that Illinois provides protections against unconscionable arbitration provisions. If an arbitration agreement appears designed to make a claim expensive to bring, to bar full recovery and to prevent the public from learning of adverse findings against the drafter, then there is an argument that the arbitration clause is not enforceable. Subrogation professionals practicing in Illinois should consider this decision when reviewing arbitration clauses as there may be legitimate challenges to a seemingly unfair arbitration clause.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Colorado Defective Construction is Not Considered “Property Damage”

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Saxe Doernberger & Vita

In the July 5, 2022, case of Indian Harbor Ins. Co. v. Houston Casualty Co., the United States District Court for Colorado addressed the issue of whether damage to defectively installed balconies is considered “property damage” under Colorado law, requiring payment by a commercial general liability policy.

Facts of the Case

The case stems from a construction project where a subcontractor improperly installed balconies on an apartment complex. The owner of the project secured commercial general liability (CGL) coverage through an OCIP insured by Houston Casualty Company (HHC). The OCIP insured the general contractor and subcontractors. The general contractor also purchased a subcontractor default insurance policy insured by Indian Harbor.

All parties agreed that the subcontractor improperly installed portions of various balconies, including flashing, water-proof sealing, and water-resistant barriers, among other defects with the installation process. The parties also agreed that other portions of the balconies were properly installed. However, in order to repair the defects in the installations, every bit of each balcony had to be torn off and re-constructed.

The OCIP provides coverage to the subcontractor for “those sums that the insured becomes legally obligated to pay as damages because of `bodily injury’ or `property damage’ to which this insurance applies.” However, the standard “your work” and “business risk” exclusions commonly found in CGL policies (exclusions j, k, and l) were removed from the HCC policy.

The Indian Harbor subcontractor default insurance policy also insured the loss, providing coverage for indemnification of “Loss,” which was defined as “costs and expenses paid by (the general contractor) to the extent caused by a Default of Performance of a Subcontractor/Supplier under the terms of a Covered Subcontract.” After paying the general contractor for the default claim, Indian Harbor brought suit to recover from the subcontractor’s liability insurer, which was HCC.  

Ultimately, HCC denied any coverage under its policy based upon the argument that there was no “property damage” as defined under their policy. HCC’s argument was that the damage that everyone agreed happened was damage to the subcontractor’s defective work itself, and therefore, did not qualify as “property damage” under the terms of the CGL policy. Eventually, both parties filed motions for summary judgment.

If There Is No “Property Damage,” There Is No Coverage

The court begins its analysis by stating that the first issue to determine is “whether the installation of the defective balconies constitutes ‘property damage’ under the HCC CGL policy and Colorado law.” The court indicated that without the existence of “property damage,” one never gets to the issue of whether there was an “occurrence” or an “accident.” HCC’s CGL policy defines “property damage” as “[p]hysical injury to tangible property, including all resulting loss of use of that property.”

The court first addresses Indian Harbor’s argument that Colorado’s Construction Defect Action Reform Act (CDARA) should resolve the issue in its favor. Since its passage in 2010, many parties to these types of cases have made an argument about the CDARA and that it should be conclusive on the issue of defective work being covered. However, this has not been the case.

The court quickly dismissed the CDARA argument as premature. Indian Harbor cites the language of the act which states, “work that results in property damage, including damage to the work itself, is an accident unless the property damage was expected or intended by the insured.” (Colo. Rev. Stat. § 13-20-808(3)). In rejecting this argument, the court reasoned that it was irrelevant as to whether there was an accident or occurrence without first determining whether there is “property damage” as defined in the HCC policy. It would be premature to discuss whether there was an accident or occurrence before first addressing whether there was property damage, because if there is no property damage, there is no coverage.

The court referenced the 2012 Colorado Court of Appeals decision in Colorado Pool Systems, Inc. v. Scottsdale Insurance Co., where an insurer refused to indemnify a general contractor for losses resulting from demolishing and replacing an improperly constructed pool. In Colorado Pool Systems, the court held that a CGL policy did not cover the cost of replacing the defectively built pool but did cover any necessary “rip and tear” damage to non-defective areas necessary for the defective pool replacement. The court did not apply the CDARA because the contract in the case was negotiated and signed prior to the statute’s enactment. However, in dicta, the Colorado Pool court stated that, “[t]he statute’s effect is clear enough. If we were to apply it, we would presume that the CGL policy covered damage that resulted from [the general contractor’s] defective workmanship.” The Indian Harbor court dismissed this as mere dicta and chose not to consider it.

The Indian Harbor court also cited the 2017 case of Peerless Indem. Ins. Co. v. Colclasure, where the Colorado federal district court applied Colorado Pool, holding that damage for repair and replacement of a defective arena roof was not considered “property damage” and thus is not covered under a CGL policy. Although, in Peerless, that court did agree that the CDARA applied, and property damage caused by defective workmanship was covered. But the court went on to conclude that “property damage” does not include costs of repair or replacement of defective workmanship but does include consequential damage to other parts of the property.

Based upon Colorado Pool and Peerless, the court denied Indian Harbor’s summary judgment motion and granted HCC’s cross-motion for summary judgment.

The Bottom Line

The court’s holding in this case, as well as the holding in Peerless, is contrary to the legislative intent of the CDARA. Section 13–20–808 of the CDARA was enacted in response to the General Security Indemnity Co. v. Mountain States Mutual Casualty Co. case. In that case, the Colorado Court of Appeals held that faulty workmanship, standing alone, is not an “accident” and that a construction defect is not an “occurrence.” In enacting Section 13-20-808, the legislature’s intent was clear that it considered a construction defect as an occurrence and that defective work should be covered by a CGL policy, unless and until it was excluded by another provision of the policy.

Specifically, the statute states the following in Section 13-20-808(1)(b)(III): “The decision of the Colorado court of appeals in General Security Indemnity Company of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009) does not properly consider a construction professional’s reasonable expectation that an insurer would defend the construction professional against an action or notice of claim contemplated by this part 8.”

Then, in Section 13-20-808(3), the statute states:

“(3) In interpreting a liability insurance policy issued to a construction professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured. Nothing in this subsection (3):

(a) Requires coverage for damage to an insured’s own work unless otherwise provided in the insurance policy; or

(b) Creates insurance coverage that is not included in the insurance policy.”

The Indian Harbor decision basically says that defective workmanship is not “property damage” that should be considered under the CDARA. This begs the question, if defective work will not be considered “property damage,” then why enact the CDARA to begin with? The CDARA was specifically enacted to overturn the holding of General Security and declare that faulty workmanship should be covered by a CGL.

SDV will monitor future decisions out of Colorado to see how this statute is used (or not used) in dealing with coverage of construction defects as occurrences and faulty workmanship.

Shortly after this decision was reached, the parties in this case reached a settlement.  

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Municipal Ordinances Create Additional Opportunities for the Defense of Construction Defect Claims in Colorado

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Ricky Nolen | Higgins, Hopkins, McLain & Roswell

Municipal ordinances may provide additional defenses for construction professionals where state law does not provide sufficient protection for Colorado’s builders.  Colorado state law can be a minefield of potential liability for construction professionals.  Even though the state legislature has stated that it must “recognize that Construction defect laws are an existing policy issue that many developers indicate adds to for-sale costs,” the legislature has remained hesitant to provide any meaningful protection from construction defect claims, resulting in almost unlimited exposure for Colorado’s construction professionals. 

Given this background of state laws that do not go far enough in protecting Colorado’s construction professionals, it may be fruitful to review municipal ordinances for new defenses and to temper state law developments applicable to construction defect claims.  This is an area of law that is only just developing in Colorado.  In fact, the ordinances discussed in this article were only passed in the last two years with many cities only adopting the present versions of the ordinances in 2021.  The two model ordinances discussed below are potentially helpful in three ways.  The first model ordinance gives construction professionals a right to repair defects in the multi-family construction and in the common interest community context.  The second model ordinance is helpful in two ways.  First, it establishes that homeowners associations may not unilaterally circumvent ADR protections included in the original declarations for such communities.[1]  Second, the ordinance reduces the risk that strict liability will be imposed on a construction professional where a building code is violated.

1.       Model Ordinance One: Durango, Colorado Code of Ordinances Sec. 6-151, et seq. – Builders have a right to repair alleged construction defects in common interest communities and multi-family construction claims.

Unlike the Colorado Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq. (“CDARA”), which only gives contractors the right to offer a repair but does not give the contractor the right to make repairs, the Durango Code of Ordinances Sec. 6-151, et seq., gives construction professionals the actual right to repair alleged construction defects in a “unit in a condominium or in a multi-family building in a common interest community.”  The ordinance contains notice requirements akin to the CDARA notice of claim procedures with which a builder must comply.  If the construction professional adheres to the notice provisions, the ordinance states: “If the builder elects to repair the construction defect, it has the right to do so and the claimant may not, directly or indirectly, impair, impede or prohibit the builder from making repairs.”  A claimant may still bring a claim after repairs are completed but only if it “believe[s] in good faith that the repairs made do not resolve the construction defects.”  A construction professional should consult with an attorney before electing to invoke this right to repair since the performance of repairs could renew the statute of limitations and repose periods if the repairs are later found to be defective as claimants will argue that the statute of limitations and repose periods start anew, at least as to the repairs, and that they run from the date of the repairs rather than from the original construction of the condition and because the ordinance imposes of two-year warranty on repairs.  A construction professional wishing to avail itself of the right to repair afforded by the ordinance should also consult with an attorney to discuss the potential negative implications to its insurance coverage caused by the performance of repairs.

Durango is not the only municipality that adopted a right to repair in the multi-family context.  Wheat Ridge, Aurora, Broomfield, Centennial, Lone Tree, and Commerce City all have similar ordinances and others may follow suit.  This right to repair in multi-family construction and common interest communities is a trend of which to be aware on a statewide basis given that this model ordinance only began showing up in municipal codes over the past two years.

2.       Model Statute Type Two: Denver, Colorado Code of Ordinances Sec. 10.204 –   Unilateral amendments to declarations in common interest communities seeking to modify or eliminate an HOA’s ADR obligations are unenforceable.

Denver Ordinance Sec. 10.204 is a straightforward ordinance that renders any unilateral attempt by a homeowners’ association to alter a declaration to modify or eliminate its ADR obligations unenforceable if the original declaration prohibited such alterations.[2]  Thus, if a declaration includes a binding and unalterable requirement that construction defect claims must be submitted to ADR, the Denver ordinance gives effect to the provision in the declaration and prohibits HOAs from shirking their ADR obligation.  To ensure enforceability, the ordinance even includes pre-approved language to be included in a declaration:

The terms and provisions of the Declaration requiring alternative dispute resolution for construction defect claims inure to the benefit of Declarant, are enforceable by Declarant and shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of such amendment.  BY TAKING TITLE TO A UNIT, DECLARATION REQUIRING ALTERNATIVE DISPUTE RESOLUTION OF CONSTRUCTION DEFECT CLAIMS ARE A SIGNIFICANT INDUCEMENT TO THE DECLARANT’S WILLINGNESS TO DEVELOP AND SELL THE UNITS AND THAT IN THE ABSENCE OF THE ALTERNATIVE DISPUTE RESOLUTION PROVISIONS CONTAINED IN THE DECLARATION, DECLARANT WOULD HAVE BEEN UNABLE AND UNWILLING TO DEVELOP AND SELL THE UNITS FOR THE PRICES PAID BY THE ORIGINAL PURCHASERS.

Denver, Colorado Code of Ordinances Sec. 10.204(1) (emphasis in original).

Developers wishing to enforce an ADR provision in a declaration should begin including language like the proposed language above if they have not already.

3.       Model Statute Type Two (Part Two): Denver, Colorado Code of Ordinances Sec. 10.202 – Code violations not an independent basis for construction defect claims or negligence per se claims, nor may courts impose strict liability for a code violation.

The same ordinance discussed in Section 2, above, also expressly states that a violation of certain specified city building codes “or a failure to substantially comply with any such code may not be used to support or prove any construction defect claim, regardless of the statutory or common law theory under which the claim is asserted.”  There is an exception when a homeowner can show that the non-conformance with the code resulted in: (1) actual damage to real or personal property; (2) actual loss of the use of real or personal property; (3) bodily injury or wrongful death; or (4) a risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants of residential real property.

The ordinance states definitively that: “Under no circumstances shall a violation of any city building code [as set out elsewhere in the city ordinances], or a failure to substantially comply with any such code, support or prove a construction defect claim based upon a theory of strict liability, or under the common law doctrine of negligence per se.”  Where members of the plaintiffs’ bar regularly use certain Colorado case law, interpreting state law, to assert that builders are essentially subject to strict liability for violations of the building code, ordinances such as this one could be a valuable tool to rebut claims alleging strict liability and may force plaintiffs to fully prove their claim as they would have to with any claim for allegedly negligent construction.  Parker, Fort Collins, and Westminster have already passed similar ordinances.  As with the right to repair ordinances, these ordinances were only enacted over the past two years and lend support to the notion that municipal ordinances are a rapidly changing source of construction defect law.

Conclusion

While there is not yet a large body of municipal construction defect law on which defense attorneys can rely, and while we have yet to see cases challenging the application of local ordinances based on preemption by state law, recent developments in municipal law are encouraging and warrant continued review as local jurisdictions take part in the regulation of construction defect claims.  Where so many of the local jurisdictions discussed in this article have only adopted their construction defect ordinances in the past two years, it is reasonable to conclude that more local jurisdictions may adopt useful regulations moving forward and construction defect attorneys should continue to monitor legal developments at the local level.

[1] This is a codification of the Colorado Supreme Court decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro.  Homes, Inc., 395 P.3d 788 (Colo. 2017), which may remain in effect even if Vallagio were to be overturned.

[2] This also is a local codification of the Vallagio decision, which may remain in force should the Colorado Supreme Court later overrule Vallagio.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Strategic Measures for Material Price Escalation

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David J. Hyun and Hal G. Block | Atkinson Andelson Loya Ruud & Romo

Increased costs for construction materials and equipment are impacting construction projects throughout the nation.  Construction contracts often do not address material price escalation which creates risks for contractors, subcontractors, and suppliers.  Therefore, it is important to understand how to protect against price escalation impacts by incorporating specific contract provisions, when possible, and preparing necessary documentation to support a claim for reimbursement for price escalation.

The key to successfully securing the approval of a change order for material price escalation is going to be based on two primary factors: (1) whether there is any language in the contract or general conditions that support such a claim; and (2) your back-up documentation as it pertains to original cost, escalated cost, and actions taken by you to secure the material at the earliest possible date and at the best cost.  The basic entitlement is going to be based on the contract clauses and the extenuating circumstances.  The quantification of the claim is going to be based on the documentation and a number of additional factors.

Price Escalation To-Do List
Documentation to back-up a price escalation claim is critical.  The first thing that will be reviewed is what was originally part of the bid or proposal, the factors giving rise to the escalation and whether or not the material in question could have been purchased at an earlier date to mitigate any price increases.  Other factors that will be considered include the expected duration of the project in relation to the time frame for the scope of work, whether the project was delayed pushing back the date of performance, actions by the owner or others that precluded your ability to purchase the material earlier, whether the material was reasonably commercially available and whether supply chain issues impacted your ability to secure the material.  To that end, if you experience a price escalation impact, it is important to comply with the notice provisions of the contract and track your actual time and damages by doing the following:

  1. Keep detailed records of all increased expenses and provide supporting documentation required to obtain payment;
  2. Track your material costs to establish the increased cost in comparison with the amount at bid; and
  3. Meet the contractual requirements supporting a change order for the increased costs or time due to the delay.
  4. Secure letters from your material suppliers as to when material price increases may be imposed and/or delivery is delayed. Use these letters and forward them to whomever you have contracted with in order to create a paper trail.  If supply chain issues become critical, then be prepared to propose alternative solutions which, if rejected, would bolster your claim.
  5. To the extent that there are delays in the project or necessary approvals that would allow you to order materials, send emails, letters and/or make sure that impacts are recorded in meeting minutes to create a paper trail noting that your costs may be impacted. To that same end, make sure that your submittals are submitted timely. 

Contract Protection – Escalation Clauses
It is recommended that you review all contracts for the presence of an Escalation Clause.  An Escalation Clause will compensate you in the event there are increases in the cost of raw material or equipment and include the following language:

  • Material prices, including construction materials, are based on current prices at the time of the Proposal.
  • Significant price increases (meaning a price increase exceeding (10%) in materials necessary to perform the work, that occur during the period of time between the date of this Proposal and Substantial Completion of the Project, shall cause the contract price to be equitably adjusted by an amount reasonably necessary to cover any increase.
  • If material or equipment required by the contract are not available due to shortage or unavailability or if the price to procure such material or equipment increases as set forth in this provision, then an acceptable substitute shall be found and an adjustment in the contract price shall be made accordingly.
  • Contractor shall be entitled to an extension of time for any delay in obtaining delivery of the item necessary for completion of the Work.

If a contract does not include an escalation provision, it is recommended that you revise the contract and include one, to the extent such contract is negotiable.  You should also review the Prime Contract to see if escalation has been addressed.  If so, the owner and the contractor should not object to including an escalation provision in downstream contracts.

It is generally recognized that to be competitive in today’s market, contractors try to run their operations lean by not maintaining large inventories of materials until immediately before they are needed.  If you cannot secure the addition of a price escalation clause, then an option in lieu of, or in addition to, an escalation clause is to make sure that there is contract language that allows you to receive payment for material purchased and stored, onsite or offsite, prior to their installation.

Negotiating Contracts During High Inflation
It is important to be proactive and incorporate systems to protect your supply of raw materials and equipment used on a project.  Make sure to negotiate for release of funds to make early purchases when necessary.  This is critical so that you can negotiate contracts that will enable you to purchase materials in advance to avoid impacts caused by price increases or product unavailability.  Furthermore, you can also confirm product lead times in advance of project needs, put a hold on material verified to be in stock, make purchases early when feasible, and obtain guarantees from your suppliers.

Conclusion
Whether you will be able to secure reimbursement for a price escalation on a given project is going to be based on a number of factors.  The inclusion of contract language to support entitlement is critical, but almost as critical is the supporting documentation noted above to prove the quantification of the claim.  Each claim will be fact specific so be mindful to create a detailed paper-trail to support your claim.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.