In the last several months, I have heard from many homebuilders and general contractor clients regarding the substantial increases in the cost of lumber and other materials; HBA Iowa reports about an 80 percent increase in lumber costs since mid-April. As the cost of materials for build projects soars, builders and contractors should review their contracts carefully to determine if they have options to get some or all of the increased costs covered by the owner and should also consider revising their future contracts to help protect themselves against abnormal material cost increases.
Contractors and builders who signed cost-plus contracts with their owner-clients are breathing a sigh of relief, as these contracts fully protect them in this regard, as all material costs are directly passed on to the owner-client. Though, contractors should carefully review any provisions in their cost-plus contracts regarding guarantees on any estimated budget and/or establishing a guaranteed maximum price, as modifications may be prudent to these types of provisions.
Stipulated Sum Contracts
Conversely, contractors are much less protected in the typical stipulated sum contract, as contractors generally bear the risk, and gain the benefit, of downward or upward changes in material and labor costs. That said, contractors should review whether the contract has any provisions addressing delays caused by the owner-client, as such provision may provide relief. For example, as the COVID-19 pandemic took hold in our nation, many buyers-clients reconsidered their project--putting the project on hold or delaying decisions needed to move the project along. If your contract contains this type of owner-delay provision and you can show that without that owner delay, material costs would not have increased, the owner-client may be liable for the increased cost.
Recommendations for Future Contracts
To help protect themselves from substantial market-wide material cost increases in the future, contractors and homebuilders should consider the following:
- Should you start using cost-plus contracts, instead of stipulated sum contracts?
- Should you add an escalation clause or other like provision to your stipulated sum contracts that allows for an increase in the contract price if there is an unexpected market-wide increase in the cost of a certain material and the contractor cannot obtain the same or similar material for a lesser amount?
- Should you add a price-lock provision to your stipulated sum contracts, which mandates only a 30- or 60-day price lock guarantee, such that the contract price is subject to increase if the commencement of the project does not occur until after that price lock period?
Other Strategies and Finding Relief
Builders and contractors should also consider the pricing language within the contracts they have with their suppliers, evaluate their supply chain, and consider other supplier options if and as needed.
In addition, I would echo our friends at NAHB - if your business is suffering from the increased costs of materials costs, reach out to your members of Congress. Although some of the increased costs can be attributed to the coronavirus (that is, low supply and high demand), the ongoing trade war adds other layers to the issue. Ask your members of Congress to work with the administration to address lumber prices.
Coronavirus continues to teach us new ways to move forward. For builders and contractors, this includes adding contract provisions to address everything from government forced shutdowns to material cost changes. Builders and contractors are encouraged to work with their attorneys to address contractual changes going forward to avoid being on the hook for these massive cost increases.
If you have questions regarding anything addressed in this article, please contact Jodie McDougal at email@example.com or at 515.242.8971.
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