Material Price Spikes Impacting Construction Projects Nationwide – Real Estate and Construction
Material price spikes are affecting construction projects across the country
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The US is facing a dramatic escalation of costs and significant price pressures both domestically and abroad. The prices of sawn timber, brick, steel and aluminum have increased, and the cost of cement and rebar could also increase. Higher copper prices have impacted electrical wiring costs and availability. Orders for wood-based products such as I-beams and floor coverings (both medium-density fibers and wood-based materials) are secured for months due to price increases of 50 percent or more. The latter deficiency is particularly acute in larger commercial projects.
In general, these cost increases are likely to lead to more construction claims, downstream disputes, and delayed start dates as owners rethink project planning due to escalating bids. Costs are also exacerbated by tariffs on imported wood, steel and aluminum. In addition, rising material costs from China have raised questions about relocating production costs and contracts from other regions of the world – possibly from South America or Africa. Some commentators have questioned whether our country can manufacture these materials domestically, or whether contractors should rethink supply chains and reorganize their contracts to account for cost increases and material delays. These issues will, of course, have an impact on the construction industry across the country.
Raw materials for projects reach double or triple the standard price, and the random wood futures have increased sevenfold as of April 2020. In the case of a “flat rate” or “guaranteed maximum price” contract, the general contractor typically bears the cost risks of escalation and coordination with subcontractors or material suppliers. However, contractors also typically have more lead time to request quotes, analyze subcontractor submissions, and finalize their agreements with subcontractors and suppliers. With the current building landscape and rising material costs, contractors at every level need to act quickly so they don’t incur higher costs for subcontractors and suppliers. The risks of acting quickly then increase in a similar manner. Some material suppliers have canceled their offers or contracts due to a lack of material. some have cited delays of six months or more and quoted prices for materials (such as wood-based panels) that will not ship before early 2022. In addition, announcements of price increases of 50 percent or more have prompted parties to redesign or rethink their materials (e.g. replacing wood-based materials with timber or steel), resulting in further price increases for these alternatives. As another example, logging companies might turn down a hard offer and instead opt for price-plus-fee arrangements to spread the risk among the contractor or owner.
In fact, it can be difficult to pinpoint the risk of cost increases. Lawyers typically include provisions on cost escalation in contracts between owners and general contractors or in subordinate agreements between contractors and their suppliers. However, the interpretation of both force majeure clauses and payment terms can create additional burdens in the wake of such an unprecedented escalation of costs. As a result, the industry can expect an increase in claims and disputes over material prices and related delays. Project participants could consider changing their contracts, adding new or changed provisions on cost escalation, or making adjustments to the terms of the contract based on certain material cost increases (e.g. due to explicit percentage increases). The parties could also negotiate contractual allowances for certain materials or include 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 rise, the construction industry has not seen such dramatic increases in material costs in years. These increases in material costs in connection with the existing lack of work and housing will continue to have an impact on the industry at home and abroad for the foreseeable future. Such bottlenecks could delay the start of new projects across the country and trigger additional claims on projects currently in progress.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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