United States: Material price spikes impacting construction projects nationwide
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The United States faces dramatic escalation in costs and material price pressures, both locally and internationally. Prices for lumber, brick, steel and aluminum have skyrocketed, and the costs of cement and rebar may also rise. Higher copper prices have affected the costs and availability of electrical wiring. Orders for engineered wood products such as I-beams and flooring (both medium density fiber and engineered hardwood) are held up for months due to price increases of 50% or more. more. The latest shortage is particularly severe for large commercial projects.
In general, these cost increases are likely to lead to more construction claims, downstream disputes, and delayed start dates, as owners rethink the schedule of projects due to increased bids. The costs are also exacerbated by tariffs on imported wood, steel and aluminum. In addition, rising costs of materials from China have created questions about shifting production costs and contracts from other parts of the world – perhaps South America or Africa. Some commentators have questioned whether our country can manufacture these materials domestically or whether entrepreneurs should reconsider supply chains and restructure their contracts to account for escalating costs and significant delays. These issues will obviously have an impact on the construction industry nationwide.
Raw materials for projects are fetching double or triple prices, and random length lumber futures have increased sevenfold from April 2020. In a “flat rate” or “maximum guaranteed price” contract, the General contractor generally bears the risks associated with cost escalation and coordination with subcontractors or material suppliers. But contractors generally have more time to request bids, analyze sub-contractors’ bids, and finalize their agreements with sub-contractors and suppliers. With today’s construction landscape and soaring material costs, contractors at all levels need to act quickly to avoid incurring higher costs for subcontractors and suppliers. The risks of acting quickly therefore increase in the same way. Some material suppliers have canceled their offers or contracts due to lack of materials; some indicated delays of six months or more, citing prices for materials (such as engineered wood products) that will not ship until early 2022. In addition, announcements of price increases of 50 % or more caused parties to review or reconsider their materials (such as replacing engineered wood with dimensional lumber or steel), resulting in further price increases for these substitutes. As another example, logging companies might refuse a firm offer, opting instead for cooler price agreements to spread the risk between the contractor or the owner.
Indeed, allocating risk for cost increases can be difficult. Lawyers typically include provisions for rising costs in contracts between owners and general contractors, or in sub-level agreements between contractors and their suppliers. But interpretations of both force majeure clauses and payment provisions can create additional tension in the wake of such unprecedented cost escalation. As a result, the industry can expect an increase in claims and disputes regarding material prices and associated delays. Project participants might consider modifying their contracts, incorporating new or amended 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 can also negotiate contractual indemnities for certain materials or incorporate cost sharing for material price increases that exceed certain thresholds.
While the general contractor can usually guard against the expectation – or the possibility – that costs will rise, the construction industry has not seen such dramatic increases in material costs in years. These increases in material costs, along with existing labor and housing shortages, will continue to impact the industry, both at home and abroad, for the foreseeable future. Such shortages could delay the start of new projects in the country and trigger additional claims on projects currently underway.
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