Page 43 - FDCC_InsightsSpecialIssue23

the Ship
Construction Law
The Stormy Waters of Price Escalation and Balancing
By Jacob J. Liro
According to an economic survey by The Associated General Contractors in 2022, the price of materials and services for construction has jumped more than 21% from March 2021 to March 2022. Year-over-year percent increases in Steel Mill Products have risen 27%, with aluminum, gypsum, and concrete not far behind. This unprecedented increase in labor and material costs has caused various issues for contractors and their respective subcontractors, including project delays, lost profits, legal disputes, and damaged reputations.
While takeoffs have always been subject to uncertainty due to changes in the markets and supply chains, the raw unpredictability of unforeseen factors has had an otherwise unprecedented impact on the price of building materials. Pricing effects arising from the Covid-19 crisis and the Russo-Ukrainian War have created an unacceptable level of volatility in bidding. Although we cannot predict the future, options can help mitigate the harmful consequences of drastic price escalations.
Whether you are an owner, contractor, or supplier, implementing an escalation clause into written contracts for construction projects is one of the most valuable options to protect yourself from rapidly increasing prices. While these contractual clauses have long existed, the tool has not been an essential resource to contractors and subcontracts in recent memory.
While there are a multitude of ways to structure escalation clauses, material escalation clauses allow for adjustments in costs or extensions of time for certain types of material after a baseline price has already been established. After establishing the contract price and the baseline prices for each material, the parties can agree to include an escalation clause that specifies certain price thresholds for each type of material. If the price of a certain material exceeds this maximum price established by the parties, then this provision could allow for the parties to reconvene and adjust the contract to reflect the drastic price increase.
Alternatively, such clauses frequently place some of the risks of material price increases back on the contractor by way of providing for a percentage allowance threshold that a particular material price must exceed before that contractor is entitled to an increase. Other contractual mechanisms include a timing component
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FDCC ANNUAL FIVES 2023
Jacob J. Liro