Price Escalation: It’s Material to Your Clients

Every time I review recent construction news, articles abound about the rise in construction material prices. Pandemic-induced constraints on supply, such as temporary plant shutdowns, together with tariffs, worker shortages, and increasing construction demand have produced an environment in which prices continue to increase at an alarming rate. Just recently, the price of lumber was reported to have increased 377% since the same time last year. And lumber is not the only material with such dramatic pricing surges; other essential materials, such as steel products, like rolled steel sheets, are experiencing price spikes, as plant operators deliberately reduced demand during the height of the COVID pandemic, believing that demand would decrease significantly, which did not occur.  At this juncture, material price escalation appears to be an unfortunate facet of the residential and commercial construction landscapes for the foreseeable future.

Construction already is risky business, with myriad challenges and often thin margins. Volatility in material prices and in supply can place substantial, additional risks on the shoulders of construction firms. Luckily, the construction industry has seen such times before, and there are various actions and contractual strategies that can be deployed to mitigate materials price escalation, such as inclusion of material price escalation clauses in contracts and/or advance purchase of materials with appropriate offsite storage arrangements.

Key to reducing such price volatility risks is being educated on resources, planning ahead, and negotiating appropriate terms in contracts. There are documents that can serve as useful templates to apportion the risks of material price volatility; the federal government, through the Federal Acquisition Regulation, has certain standardized clauses that can be negotiated and incorporated in certain circumstances, and the ConsensusDOCS initiative publishes a standardized document, ConsensusDocs 200.1 Amendment No. 1 Potentially Time and Price-Impacted Materials, which can be executed contemporaneously with the owner-contractor agreement to set forth mutually agreed approaches to time and to price adjustments for certain materials for incorporation into the construction work.

To make the surety community and, in turn, its construction clients aware of issues relating to material price increases and proven strategies to address such challenges, NASBP is putting this subject front and center. NASBP recently posted an article, entitled “Best Practices for Addressing Rising Construction Material Costs,” written by attorneys Richard Reizen and Patrick Johnson of the law firm of Gould & Ratner LLP in Chicago, Illinois, as a NASBP Blog on the nasbp.org site. Richard Reizen also will be a featured presenter on this subject at both the upcoming East and West meetings this fall, so attendees will gain the benefit of his practical and legal insights and can ask specific questions.

As further developments occur, NASBP will continue to provide information and resources on this critical topic.