Pricing insanity: Material costs escalate, driving contractor desperation

Pricing insanity: Material costs escalate, driving contractor desperation

Phil Puccio

At conventions, on Zoom calls and in casual conversation, it’s the only thing contractors talk about anymore. Everyone wants to know how everyone else is dealing with the rapid escalation of material prices, a crisis that revved up last spring and shows no signs of slowing down for at least another year.

“Starting in March of this year, it just became all-consuming,” said Brian Perlburg, senior counsel of construction law and contracts for Associated General Contractors of America. “It hasn’t let up. It’s become an evergreen issue.”

“Contractors have the most difficult job in America today because every decision is fraught with risk and uncertainty,” said Anirban Basu, chief economist for Associated Builders and Contractors, as he predicted material costs would continue to soar well into next year.

Everything costs more

COVID-19-related disruptions devastated global production and supply chains, which continue to be ravaged, but that’s only one of many factors causing prices to spike. China’s new emissions-reducing limits on metal production, factory closures throughout Asia, a disruptive winter storm in Texas, a natural gas shortage in Europe, global transport problems and labor shortages have all contributed to skyrocketing costs — and construction firms locked into contracts based on 2020 and pre-2020 prices are feeling the heat.

Prices of construction materials soar

Producer price indexes for select construction commodity groupings, not seasonally adjusted

“All projects right now are trending over budget,” said Donny Smith, director of preconstruction services for Orlando, Florida-based PCL Construction. “Everything costs more — if you can get it. There are certain air-conditioning units that, I don’t care if you have millions to offer, you can’t get. These are things you can’t overcome. Flexibility is a highlight.”

In this uncertain climate, contractors are doing what they can to cope and finding some interesting workarounds to keep their projects moving. For example, over the past six months, PCL helped one client slash costs by suggesting a shared fitness facility for two buildings instead of two separate gyms and helped another eliminate two floors of a downtown Orlando high-rise by incorporating micro-apartments, Smith said.

“Partnerships are more important now than they ever were before,” he added. “In the preconstruction relationship, we can come up with fresh new ideas that don’t necessarily compromise the job but allow you to crunch the math several different ways and come up with alternatives.”

Justin Aubuchon

Permission granted by BOND Building Construction

 

Communication and transparency between contractors, subcontractors, and clients — always important — is now critical, said Justin Aubuchon, chief estimator for Boston-based BOND Building Construction. Contractors need to get multiple perspectives by talking constantly with subs and keeping up with construction news so they have all the information they need to create relief valves and course corrections well before high costs or lack of materials cause delays, he said.

“It’s not just about spending more money. The solution is more work,” he said.

Like most contractors, BOND is purchasing materials as soon as contracts are signed and pre-purchasing some materials to lock in prices and ensure on-time arrival. Aubuchon is also working closely with architects, owners and subcontractors to keep a close eye on submittals up and down the pipeline.

“You don’t want a sub coming back to you and saying, ‘I delayed my purchasing,'” he said. 

Partnership at all levels is key to success in these times, Basu agreed. “Too often, we’ve had this dividing line between project owners and general contractors and another line between general contractors and subs. This has to be one happy family. Everyone has similar challenges, and everyone has the same objective. It makes sense to have some risk-sharing moving forward.”

That said, Basu added, “having a good attorney is a really good idea at a volatile time like this.”

Escalation clauses

Until this year, many contractors were unfamiliar with material price-escalation clauses, which allow construction firms to pass on a percentage of procurement price increases to owners so they can build smaller contingencies into their bids and also give owners an opportunity to share in savings if prices drop. These clauses specifically address volatile price increases, as opposed to force majeure clauses, which excuse parties from contractual obligations due to catastrophic or unforeseen events but may include only time extensions, not monetary relief.

“Many people didn’t have price-escalation clauses in contracts because they would have been hard to get before this was a full-blown crisis,” said Perlburg, who is also executive director of ConsensusDocs, a catalog of design and construction contracts. More users downloaded free samples of ConsensusDoc’s material price-escalation clause in April than in all of 2020, Perlburg added, and interest isn’t letting up.

“People have activated on this issue very strongly,” he said. “Owners and other stakeholders in the process are willing to talk and do something reasonable.”

John Greenhall

Permission granted by Cohen Seglias Pallas Greenhall & Furman

 

Owners are more open to discussing the possibility of including money for escalation in contracts, according to John Greenhall, a partner at Philadelphia-based Cohen Seglias Pallas Greenhall & Furman, PC.

“They want to keep a tight rein on it, and contractors and subcontractors have to be willing to share information,” he said. “If contractors are willing to show what prices are in their bids so escalation can be tracked, owners are willing to talk to them. I see that on projects both big and small.”

David Toney

Permission granted by Adams and Reese

 

Volatile material price increases of building materials in 2021 has again highlighted the importance of addressing potential material price increases at the contract stage, said David Toney, a partner at Houston-based Adams and Reese, LLP. To be effective, he added, price-escalation clauses must identify specific materials likely to have short-term volatile pricing and establish common understanding of what “volatile” means, which could be anything from 5% increase over 30 days to a 30% increase over 180 days.

Lee A. Weintraub

Permission granted by Becker & Poliakoff

 

Lee A. Weintraub, a shareholder at New York-based Becker & Poliakoff, suggested designating allowances rather than line item costs for the most inflated and hard-to-get materials such as stucco and concrete when writing contracts. Having public clients purchase materials directly using their tax breaks could also provide some relief, he added.

No matter what, said Kenneth M. Roberts, chair of New York-based Venable LLP’s Construction Law Group, price-escalation clauses must be crystal clear, spelling out exactly how both parties will share the extra burden when material prices increase by a mutually determined amount and specifying substitutes if materials are unavailable.

Kenneth M. Roberts

Permission granted by Venable LLP

 

The impact of COVID and supply-chain disruption on subcontractors and contractors, Roberts added, “goes directly to the quality of their contracts and the reasonableness of who they’ve contracted with.” Owners who refuse to share the risk during the contracting stage aren’t likely to get any easier to work with once the project commences, Roberts warned.

“You’re working with someone who doesn’t want to work with you to find a fair compromise. The second you know that, put on your battle armor,” he said. “You are really taking a risk on that contract. I hope to God, for that risk, you have adequately priced it.”

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