Trent Cotney, CEO, Cotney Attorneys & Consultants
From coast to coast, the construction industry is feeling the squeeze from inflated material costs. These increased prices can be traced to continuing effects of the COVID-19 pandemic, as some manufacturers periodically had to close down, production slowed and transportation restrictions hobbled distribution. But in recent months, prices are continuing to climb higher, due in large part to a scarcity of materials, an increase in diesel fuel costs and a shortage of truck drivers.
Diesel fuel prices are on the rise as the cost of crude oil continues to jump (now $60 a barrel, up from $37 a year ago). The per-gallon diesel price in March was $3.07, up 22 cents from last spring. These elevated prices are bad news for the trucking industry since fuel accounts for 39 percent of its total operating expenditures. The trucking industry, which moves and delivers more than 70 percent of the freight in the United States, is facing further bad news. It relies on more than 3.5 million drivers to keep the process running, but it is experiencing a driver shortage. This year, that shortfall is estimated to be about 60,800 and some expect that driver deficit to escalate to 160,000 by 2028.
This combination of higher fuel costs and fewer truck drivers is contributing to increased freight costs, which results in pumped-up price tags for all kinds of materials. To protect yourself and your company, here are some steps to take:
Now more than ever, it is critical that you review your contracts and understand their provisions. One essential element to consider adding is a price acceleration clause. If you see material prices going up after you have signed your agreement, this provision permits you to increase your price accordingly. Language in a standard price acceleration clause will usually state that if material costs rise by more than five percent, your price will also increase but without the need for a change order. You will likely be required to provide the owner with evidence of the applicable price increase. Here is an example of the provision:
If there is an increase in the actual cost of the labor or materials charged to the Subcontractor in excess of 5 percent subsequent to making this Subcontract, the price set forth in this Subcontract shall be increased without the need for a written change order or amendment to the contract to reflect the price increase and additional direct cost to the Subcontractor. Subcontractor will
submit written documentation of the increased charges to the Contractor upon request.
You should also review your contract for language regarding delays. Many kinds of delays, such as those caused by extreme
weather, are regarded as excusable and warrant extensions. However, in some cases, material delays may not fall into this category. So, if you experience a delay in receiving materials, you may be expected to accelerate work to make up the time. Those additional hours can really impact your bottom line so, if possible, add a material delay clause that will allow for an extension.
Another beneficial option is a material substitution clause. This provision will allow you to make a reasonable substitution to a specified material if you find that the material is not available due to factors outside your control.
While those contractual elements can provide significant protection for contractors and subcontractors, many owners may not agree to them. They may insist on seeing fixed prices in the contract and they may not allow for extensions or materials substitutions. In that case, you can explore building up an inventory of materials that you commonly use.
To complete such an inventory, have a conversation with your key suppliers and let them know what your needs and priorities are. Develop a strong relationship with them and ask for their knowledge regarding shortages and other trends. When you create a genuine partnership with your vendors, you have a more solid chance of getting the materials that you and your customers require.
If you do not have the protective contractual clauses in place and you realize over the course of a project that you may have trouble getting materials, your crew needs more time or prices have increased, do not hesitate to submit a change order. If your customer does not answer your request, follow-up with emails or other documentation, so you have a paper trail. Often, there are provisions within your contract that you may be able to use to give you a colorable argument in support of a contract adjustment.
Also, keep thorough records from your suppliers regarding delays and price increases. Your careful documentation will help support any legal claims you may need to make later.
As your projects progress, make sure you keep your customers informed. If you anticipate a delay or realize a material will not be available, update them every step of the way. Consider their individual situations and offer solutions. You may be able to offer additional consideration in exchange for paying for cost increases such as a longer workmanship warranty.
The events of the last year have definitely proven that we cannot predict what the future will hold. But by remaining nimble and transparent and managing your customers’ expectations, you can help ensure that your clients will be pleased with every finished project. This practice will go a long way in keeping your company viable and successful for many years ahead.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Trent Cotney is Board Certified in Construction Law by the Florida Bar, an advocate for the roofing industry and General Counsel of FRSA. For more information, contact the author at 866-303-5868 or visit www.cotneycl.com.
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