Pandemic-Related Construction Materials Pricing Poses Challenges in Construction Lawsuits

Nick Stewart | Construction Executive

During the global pandemic the construction industry saw unprecedented inflation in the cost of building supplies as a result of a myriad of issues. On May 7, 2021, lumber prices hit a record high at $1,670.50 per thousand board feet. This was more than six times their pandemic low in April 2020. This significant price spike was related to closure of sawmills during the height of the pandemic, low supply, soaring demand to expand existing homes or purchase new construction, the western U.S. wildfires and tariffs.

More recently, lumber prices have fallen but they are still up nearly 100% from spring 2020. Some experts believe that the recent wildfires in the western United States and upcoming hurricane season will cause prices to jump back up in the upcoming months.

Additionally, since March 2020, steel prices are up roughly 200%. The increase in steel prices is a result of many of the same factors causing lumber pricing spikes. Many steel mills shut down production or drastically reduced production during the early days of the pandemic expecting a deep recession and/or to comply with restrictive government mandates. Despite these industry expectations, demand for steel -elated products like grills and home appliances soared. These household demands for steel-based products impacted the price of steel for construction projects. Prior to the pandemic, hot-rolled steel traded between $500 and 800 per ton but hit an all-time high of $1,825 per ton in early July 2021.

WHY DOES THIS MATTER TO CONSTRUCTION LITIGATION?

The answer to this question is cost of repair estimates. In cases involving large commercial or multifamily projects, the price of lumber and steel at the time the repair estimate was generated may vary widely. A cost of repair estimate that was generated around the timeframe of the historic lumber and steel spikes is going to reflect an inflated cost of repair that may no longer be a reflect of present-day market pricing. It is essential when reviewing materials provided by cost of repair experts and deposing a cost of repair expert to determine when their lumber and steel related quotes were generated. This may involve digging deep into the repair experts’ discussions with suppliers to determine when the quote was solicited. If the quote was generated during a price spike, it may be worth determining where the repair expert received the quote and contacting the vendor to inquire if the present-day prices have dropped.

Another problem that has been common during the lumber and steel spikes is that pre-pandemic cost of repair estimates may no longer be viable. For example, a cost of repair estimate that was generated based on 2019 prices may undervalue the cost of the repair under current 2021 prices. Be careful of this. Lawyers are now moving the proverbial goalpost in the middle of litigation to account for present day pricing. Parties may have a general understanding of cost exposure related to estimate submitted early in litigation and there is the possibility that estimate is outdated. A new repair estimate may be needed to reflect present day pricing and, in most instances, that new estimate will be more expensive than a pre-pandemic estimate.

HOW TO HANDLE COST OF REPAIR ESTIMATE IN VOLATILE SUPPLY COST WORLD

 The best way to handle litigation cost of repair estimates during these unprecedented times is to obtain as much information as possible on the basis of the material estimates. Here are some of the key areas to address in discovery when dealing with a cost of repair estimate:

  • Determine the vendor(s) that provided construction material quotes;
  • Ask when material quotes were requested and received;
  • Find out if an updated quote has been requested to reflect market current pricing;
  • Discover if other vendors can provide a more competitive price; and
  • Determine how long a material vendor will honor the quote.

Answers to these topics will allow a construction litigator to assess how accurate a proposed cost of repair estimate is to present day material costs. If it is determined that the cost of repair estimate was generated during the time of lumber and steel spikes, that cost of repair estimate may be inflated, and it could be worth addressing that inflation with the cost of repair expert to determine if he willing to concede the unusual spike in construction materials. If the cost of repair expert is unwilling to admit the reality of the current construction material market, then it may be possible to challenge his credibility as an expert in construction material pricing. Also, it is imperative that these questions be addressed delicately as a pre-pandemic cost of repair estimate may actually pose less exposure given that it does not account for modern day inflated material prices.

In sum, while the global pandemic continues to impact nearly all aspects of everyone’s daily lives, it is important to keep an eye on how it has impacted construction materials when addressing cost of repair estimates in construction litigation. All construction cases that involve a cost of repair estimate should be vigorously scrutinized to determine if costs are an accurate depiction of the current marketplace. Finally, as a construction case progresses it is important to monitor the fluctuation of construction material pricing to determine if a cost of repair can be discredited based on outdated material pricing information.

Building Materials Price Increase Clause for Contractors and Subcontractors – Three Options

William L. Porter | Porter Law Group

With the arrival of inflation come concerns regarding increases in the price of building materials within the construction industry.  Contractors, subcontractors and others who contract to perform construction work can suffer significant losses when the prices they must pay for materials rises significantly between the time they sign the contract and actually purchase the materials.  The general rule is that, unless there exists a contract clause allowing contractors or subcontractors to pass significant price increases for materials on to others, contractors and subcontractors are stuck with the price stated in the contract or subcontract.  When prices rise, the contractor or subcontractor eats the difference.  Rising prices can thus turn a profitable project into a catastrophic failure. How are contractors and subcontractors to protect themselves?

Once a contract is executed, there is usually little that can be done to change the document to address rising prices. Effort must therefore turn to future protection.  The best technique for dealing with increasing future prices for building materials is by adding a price escalation clause to contracts and subcontracts.  While this will not help for past contracts or subcontracts, it can certainly offer significant protection going forward.

Contractors and subcontractors alike often sign contractual documents without a proper assessment of the risk of each clause. While it is never appropriate to try to hide clauses within a contract, it is also not the job of the drafter of the contract to explain each contract term to the opposing party.  One helpful technique to successful contract drafting and negotiation is to avoid having any single clause stand out from the others, either due to its length or complexity.  It is instead often best that each clause be appropriate for its context.

Set forth below are three options for contractors and subcontractors to consider in dealing with future increases in the price of materials. Adding a clause like one of these to a construction contract or subcontract before it is signed allows a contractor or subcontractor to pass a significant price increase for materials on to those with whom it contracts.  While neither of the three options may be appropriate for any particular circumstance, a review of them may be helpful to contractors and subcontractors hoping to add a little protection on an issue which seems to present a significant looming concern.  The main difference between the three options presented is the length and complexity of each.

Among the options, please note that there is a blank space in each for the percentage by which the price for materials must increase before the contractor’s customer may be required to compensate the contractor for those price increases.  In each case, the triggering percentage is subject to determination which will depend on the needs of the contractor.  The specific percentage may depend on how much the materials component of the contract compares to the labor component.  It is not uncommon for clauses like this to be as low as 5% and as high as 25%.  The percentage will depend on the situation and negotiation skill.

In using a contract term like those below, it is important to customize the language to the rest of the contract document.  The terms used in the example are “Contractor” and “Customer”.  It could just as well be “Subcontractor” and “Contractor” or “Contractor” and “Owner”.  The point is that it is necessary to use the terms that are consistent with the rest of the contract or subcontract document in which they are used.  Here are those options for consideration:

Long Version

Materials Price Increase:  In the event that there are significant increases in the prices that Contractor pays for materials and supplies for the work to be performed between the date the Agreement is signed and the date that materials are purchased for the work to be performed, Contractor shall be entitled to additional compensation from Customer as described herein.  A significant increase in price is defined herein as an increase as to any specific items of materials of _____ percent (__%) or more.  In such a case, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any such items of materials has increased beyond __%.  This would apply, but not be limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment. Contractor is entitled to demonstrate this price increase through the use of quotes, supplier list prices, invoices or receipts, when requested.  Contractor shall not be responsible for increased prices of materials when caused by delays, shortages or unavailability of materials due to conditions not caused by Contractor.

Short Version

Materials Price Increase: Contractor shall be entitled to additional compensation from Customer when the price for any materials to be used on the Project increases _____ percent (__%) or more between the time the Contract is signed and materials for the project are purchased.  In such a case, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any item of materials has increased beyond __%.  This would apply, but not be limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment. Contractor is entitled to demonstrate this price increase through the use of quotes, supplier list prices, invoices or receipts, when requested.

Shortest Version

Materials Price Increase: When the price for any item of materials to be used on the Project increases _____ percent (__%) or more between Contract signing and materials purchase, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any materials item has increased beyond __%, as demonstrated by Contractor.  This includes but is not limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment.

Conclusion

When contractors and subcontractors encounter situations on a project that are not properly addressed by the terms of their contracts and subcontracts, it is time to revise the operative document.  With the recent threat of inflation and corresponding increases in the prices of building materials, contractors and subcontractors would do well to consider a clause to protect themselves from such events.  Even though inflation is beyond the control of contractors and subcontractors, the right contract language can at least help to weather the storm.  Those who actively protect themselves with protective contract language are more likely to survive difficult times when others do not.

Material Price Escalation Has Become A Source Of Substantial Conflict In Construction Contracting

V. James Dickson and M. Scott Jones | Adams and Reese

The cost of building materials has risen significantly this year. Who should bear this risk and how can the various parties to construction contracts mitigate this risk?

Owners, contractors, subcontractors, and suppliers have historically taken divergent perspectives in the control of risk of material price increases on construction projects.

An Owner’s position is that prices are fixed once a contract is signed and that increases must be limited to signed change orders. Downstream contractors, subcontractors, and suppliers will contend that any unplanned event or condition that causes results in an increased cost is a basis for an extra. Until recently, the risk of such unexpected material price increases have been relatively infrequent, so construction contracts have often not directly addressed such risk. Volatile material price increases of building materials in 2021 has again highlighted the importance of addressing potential price increases when negotiating construction contracts.

Many downstream contractors, subcontractors, and suppliers faced with unexpected material supply costs attempt to pass them on to the Owner or upstream parties by asserting a force majeure or a cardinal change event. An Owner faced with such unplanned costs will, however, generally reject such claims unless directly addressed in the contract. Neither legal theory would typically apply to a product price increase. The result is that litigation will likely arise to resolve such unexpected conditions.

A better approach is for all parties to recognize potential volatility in material price increases and negotiate a mutually acceptable price escalation clause. Factors in such approach should include an analysis of the following:

  • Can specific materials be identified that will likely have short term volatile pricing?
  • Can a common understanding be reached as to what constitutes volatile pricing (i.e., 5% over 30 days or 30% over 180 days)?
  • Can contractors or owners identify any suppliers for that will provide fixed pricing for specific materials for a period of time?
  • Can materials be ordered at commencement of project and stored on-site or at approved off-site location until needed?
  • What is the overall potential impact on the contract pricing?
  • Can use of a contingency line item be used for unexpected volatile pricing?
  • Can the parties agree to give benefits to an Owner if material prices go down?

Owners, contractors, subcontractors, and suppliers should consider these issues when negotiating agreements. Price escalation is not likely to disappear soon. As with many issues, open and honest communication often is vital to a good working relationship and addressing this issue before a project begins may help avoid litigation on the back-end of a project.

How are you Dealing with Material Delays / Supply Chain Impacts?

David Adelstein | Florida Construction Legal Updates

In a prior article I discussed a material escalation provision in your construction contract to account for the volatility of the material price market.  While including such a provision may not have been much of a forethought before, it is now!

What about concerns with the actual supply chain that impacts the availability of and the lead time of materials?  How are you addressing this concern in your construction contract?

The pandemic has raised awareness to this issue as certain material availability has been impacted by the pandemic.  As a result, parties in construction have tried to forecast those materials where delivery issues may occur including those materials with longer than expected lead times.  But equally important is how this issue is being addressed in your construction contract including how you want to negotiate this risk in future construction contracts.

Start with the force majeure provision.  Does this force majeure provision address supply chain impacts?  It may touch upon it but you may want more clarification dealing with delivery delays that impact a project’s schedule and identifying that this includes a supply chain impact attributable to a specific occurrence, such as the pandemic.  Generally touching upon an issue is not the same as specifically addressing an issue for practical purposes to avoid any dispute down the road.

One way is to include or address certain supply chain impacts caused by the COVID-19 pandemic, any future pandemic, and other potential factors based on the current economic climate.  If one thing COVID-19 taught us is that we need to fully address the risk of pandemics moving forward, both from a time standpoint and a cost standpoint.  Another thing COVID-19 taught is to precisely word force majeure and other provisions so that parties are on the same page when it comes to a foreseeable risk.

The provision can be broad enough to include any supply chain impacts caused by the pandemic and any future pandemic and/or can include specificity based on certain materials that are known as of the date of the contract that have anticipated supply chain concerns and long lead times.  While a contractor does its best to account for materials with long lead times, there are factors that can come into play associated with when that material is procured including the construction documents, the approval of shop drawings, deposits for fabricated items, transportation including where the material is being shipped from, and storage and staging issues.  In other words, there are factors that can lead to delays in deliveries that simply occur regardless of the planning.

When preparing and negotiating your construction contract, consider the issues associated with material escalation and supply chain impacts.

Material Price Escalation Has Become a Source of Substantial Conflict in Construction Contracting

V. James Dickson and M. Scott Jones | Adams and Reese

The cost of building materials has risen significantly this year. Who should bear this risk and how can the various parties to construction contracts mitigate this risk?

Owners, contractors, subcontractors, and suppliers have historically taken divergent perspectives in the control of risk of material price increases on construction projects.

An Owner’s position is that prices are fixed once a contract is signed and that increases must be limited to signed change orders. Downstream contractors, subcontractors, and suppliers will contend that any unplanned event or condition that causes results in an increased cost is a basis for an extra. Until recently, the risk of such unexpected material price increases have been relatively infrequent, so construction contracts have often not directly addressed such risk. Volatile material price increases of building materials in 2021 has again highlighted the importance of addressing potential price increases when negotiating construction contracts.

Many downstream contractors, subcontractors, and suppliers faced with unexpected material supply costs attempt to pass them on to the Owner or upstream parties by asserting a force majeure or a cardinal change event. An Owner faced with such unplanned costs will, however, generally reject such claims unless directly addressed in the contract. Neither legal theory would typically apply to a product price increase. The result is that litigation will likely arise to resolve such unexpected conditions.

A better approach is for all parties to recognize potential volatility in material price increases and negotiate a mutually acceptable price escalation clause. Factors in such approach should include an analysis of the following:

  • Can specific materials be identified that will likely have short term volatile pricing?
  • Can a common understanding be reached as to what constitutes volatile pricing (i.e., 5% over 30 days or 30% over 180 days)?
  • Can contractors or owners identify any suppliers for that will provide fixed pricing for specific materials for a period of time?
  • Can materials be ordered at commencement of project and stored on-site or at approved off-site location until needed?
  • What is the overall potential impact on the contract pricing?
  • Can use of a contingency line item be used for unexpected volatile pricing?
  • Can the parties agree to give benefits to an Owner if material prices go down?

Owners, contractors, subcontractors, and suppliers should consider these issues when negotiating agreements. Price escalation is not likely to disappear soon. As with many issues, open and honest communication often is vital to a good working relationship and addressing this issue before a project begins may help avoid litigation on the back-end of a project.