“Pricing Insanity: Material Costs Escalate, Driving Contractor Desperation,” Supply Chain Dive

“Pricing Insanity: Material Costs Escalate, Driving Contractor Desperation,” Supply Chain Dive

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.

COVID-19-related disruptions devastated global production and supply chains, which continue to be ravaged, but the pandemic is 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.

Escalating Use of 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.

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, a shareholder at Ft. Lauderdale, Florida-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.

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