Owners, developers, contractors, subcontractors, and others in the construction industry have become all too familiar with dramatic increases in the price of certain construction materials since the COVID-19 pandemic began disrupting global trade in early 2020. While the prices for many materials had begun to recede from their early-pandemic peaks over the past several months, the war in Ukraine has once again driven prices for certain materials – especially steel and fuels – through the roof. In such a volatile economic climate, it is especially important for owners, developers, contractors, and subcontractors to pay close attention to contract terms allocating the risk of the cost increases and overruns relating to these unforeseen spikes in materials pricing.
First and foremost, it is critically important to carefully read and review any construction contract or subcontract terms in order to ensure that all parties fully understand and agree to the allocation of risks for increased materials pricing on any given project. For a contractor or subcontractor performing work on a project, this risk is especially important in fixed-price projects, where that contractor or subcontractor can easily end up underwater on a job when material prices increase. On the other hand, an owner or developer (or a contractor subcontracting work out) may be more concerned with price increases on jobs contracted on a cost-plus basis, where material price increases may dramatically increase the total amount owed to the contractor to complete the project.
In addition to the express terms of a contract governing allocation of risk for material price increases, the parties to a construction contract should carefully review any force majeure (i.e. “act of god”) clauses in the contract. These clauses may provide exceptions to the general risk allocation rules where unforeseen shortages, delays, work interruptions, or price increases result from rare and often unforeseeable outside factors such as war or a pandemic – although there may also be exceptions to these exceptions (such as where war increases material prices but does not directly physically impact a project). Parties to a construction contract should also look to the terms of the contract to determine whether substitution of like-quality materials may be permitted in order to avoid substantial cost overruns resulting from material price increases.
These are just a few of the many considerations to take into account when evaluating and planning for potential cost overruns due to material price increases. If you have questions or would like to evaluate your own potential risk exposure to material price increases, please contact your DSV attorney or Alex Trueblood at firstname.lastname@example.org.