This article is taken from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction attorney, who serves clients in the state of Florida. In this article we will discuss how to deal with material price escalation – a real problem that is affecting the construction industry.
The Cummings Building Value Index is a summary of the last 12 months of price escalations.
The Current State of Material Prices
On the high end, steel pipe and tube is up 57%, but other things that are very standard like gypsum products at 21.6%, and lumber and plywood at 48%. So these are significant price increases.
This is a great resource, but when you ask someone to give you more money for the contract you have already signed, one of the things they are going to want to see is some hard evidence associated with the material price increase. So providing this chart is one good resource.
a. Other good sources of cost information
The other two resources are the Associated General Contractors 2022 Construction Inflation Alert and the Florida Department of Transportation Construction Cost Indicators.
i. AGC 2022 Construction Inflation Alert
The AGC 2022 Construction Inflation Alert has been put out almost monthly. So if you Google that, you will get the latest version. It has a lot of information from the AGC economist, lots of charts, graphs, and information you can use to support your claim or request for a material price escalation clause.
ii. FDOT Construction Cost Indicators
FDOT Construction Cost Indicators is another great resource. They focus primarily on horizontal construction. So a lot of things like asphalt and those types of things are in the FDOT Construction Cost Indicators report. That comes out periodically so if you Google that, you will find the latest version.
So if at any point you need to provide someone with evidence that this is really happening, that the prices are going up and you need to show by how much, these are all great resources you can refer to.
Dealing with Existing Contracts
Now we get to how to deal with your existing contracts.
a. Verbal contracts
First, we start with the easier condition – verbal contracts.
i. Verbal contracts have much more flexibility
The first thing you have to figure out is what kind of contract you have. A verbal contract is much easier to negotiate around because it will be just your word versus their word that for example, the price went up when it did not go up.
If you have only a verbal contract, you probably have little concern, or rather should have little concern that you are going to be bound by that price. This is because there is no written agreement but if you have a quote or proposal that has a price change. Now it gets a little more complicated.
ii. If based on a quote or proposal, check for expiration date
The first thing you want to look at is whether that proposal or quote has an expiration date. In the old days, back in 2021, a quote would say that it is good for 30 days. So if you signed it and sent it back, you now have a binding contract with the other side for that amount of money.
Does it have that? For vendors and subcontractors that are giving quotes, assume it has an expiration date that pretty much says this quote is good through the end of today. So take a look at what the proposal or quote says as far as an expiration date.
iii. Consider retracting quote, offer, or proposal before it is accepted
If the offer, quote, proposal, or estimate has been tendered and you have given it to the other side, or the other side has given it to you, one way to end the relationship is to retract the quote. So if you do not have confirmation that it has been accepted, then you can retract it.
That is another thing that you should consider doing. If you have sent someone a quote and you think you cannot honor that price anymore, but they have not responded back, then send them a letter or email and indicate that your quote or estimate has been retracted.
b. Written contracts
Now we get into the more difficult situation – written contracts.
i. Written contracts are much harder
These contracts have multi-pages, and lots of terms and conditions.
ii. Most written contracts have firm pricing
What you will find is typically these contracts have very firm pricing provisions.
iii. Most written contracts have a form no-escalation provision
So they have a firm ‘no escalation’ provision. It may be a sentence, it could be a paragraph, but in essence, it says that under no circumstances is your price allowed to change for any reason no matter the cause.
iv. Some things to look for and consider in your written contract
First, you want to look at your written contract that you have. What does it say about escalation? If it says nothing about escalation, just know that the construction law generally will impose upon you an understanding that barring an exculpatory clause, some clause that would give you the right to change a term in the contract like the price. This price – even if there is no escalation clause – should be firm.
So to reiterate, you look at your contract, and there is no escalation clause. It just says that your price is $100,000 to do this work. Unless you can find a provision in the contract that says you can change that price, more likely than not, that price is still a firm price. Because it is listed in the contract as one of the material terms.
c. Price adjustment
So let us take a look at some of the other things that you can do or consider trying to get a price adjustment.
i. Was it signed? If not, do not sign
The first thing is, is the contract that you are dealing with signed? If it is not, do not sign it. For example, there is a subcontractor who has a contract, and it has a ‘no escalation’ clause in it.
He cannot do it for the price he quoted, and he wonders what to do. He did not sign the contract, so he does not technically have an agreement. So he just has to say he does not agree.
Now there are some conditions to this. It is not always as simple as when you get the contract and you do not sign it, then you are off the hook. The reason is that maybe when you submitted your bid, you entered into an agreement at bid submission time that says you will agree if you are awarded to the contract, you will be bound by their standard terms and conditions.
Usually, they will attach a copy or reference a copy, or send you to a website that has the terms and conditions.
Was there a bid agreement or LOI that requires performance?
Maybe you signed an LOI six months ago (Letter of Intent) and that LOI required performance, required that you be bound, and required that by signing this Letter of Intent, you agree to all of the terms and conditions of your contract.
If that is the case, then even if you have not signed the actual contract, you have to look at those issues because you may still be contractually bound to honor that price.
ii. Was a bond issued? If not, delay in issuing bond
The next thing to look at is if there was a bond that was required, and if so, was it issued? If that bond is required but has not yet been issued, it is suggested not to issue that bond. If you are going to consider pulling out of the contract, you want to minimize the number of entanglements that you have.
Issuing a payment and performance bond to the owner, the contractor, or the subcontractor complicates things a great deal. Because if you provide that bond and they are in possession of it and you pull out of the contract, they can make a claim on your payment and performance bond.
Failure to issue a bond may be a default
Now this is a catch-22. Just know that if you promise to issue a bond in your contract and you fail to issue that bond because you are protracting your agreement to participate in the contract, that by itself is a default.
You have a default for not doing the work, but you have another default because you agreed to provide a bond and you never did. So keep those things in mind. If you know that you are not going to do the work, do not make things worse by issuing the bond.
You will see that because this is happening, owners and contractors are demanding bonds much earlier from their subcontractors. Because they recognize that having a bond from a subcontractor limits their ability to not honor the contract because of price escalation.
So typically, you would see buyouts of subcontracts happening much closer in time to when that first subcontractor needed to do work. You will see that buyout happen much earlier. Additionally, even when the buyout occurs, you would typically see bonds issued closer in time to when the subcontractor was doing the work.
Now you will see those bonds being issued right away when the contract is signed. The other thing we are seeing more and more of is to bid bonds on private projects. Typically, a bid bond is something you would see on a public project.
A bid bond is a bond which says you agree that if you submit a price and you issue a bid bond, that if you are awarded the contract, you will honor that contract and sign that contract. One of the ways that contractors on private jobs get subcontractors to commit to honor their price and sign a contract is that they now demand bid bonds from their subcontractors who submit prices to them.
Those are all the things that you are going to see happen in the marketplace now. So just know that if you submit a bid, they require a bid bond, and you provide the bid bond, if you do not sign that contract, depending on the terms of the bid bond, you will be liable for 10-20% of the contract value. This is if you do not honor your agreement to participate in the contract.
d. Check for other contract provisions
Now we will take a look at some of the contract provisions that you should consider.
i. Force majeure
Force majeure gets bandied about all the time. Many individuals think they can get out of bad construction contract situations because of the force majeure clause. The conversation often goes like this:
Most contracts that you see have a very limited, if any, force majeure provision. You need to understand that force majeure as a concept will exist if you have a verbal agreement. But if you sign a contract, it has all the terms and conditions, and it does not have a force majeure provision, you do not automatically get to imply that this provision exists.
Moreover, force majeure provisions and contracts are seen in a very limited nature. For example, there is a force majeure provision, but it only says it will allow for a delay or change in the contract to the extent that there is a hurricane lasting more than three business days that affects the critical path of the schedule.
That is an example of a forced majeure provision that may be in your contract, but it is very limited in nature. But you still need to check.
If provision mentions ‘war’ or ‘armed conflict,’ can you tie escalation to the Ukraine?
One of the things you may be able to hook into is if you can find any provision in your contract, particularly a force majeure provision that talks about war or armed conflict. Generally, if you can tie what is happening to you, to the armed conflict in Ukraine, then now you at least have something to talk about.
So that is another area you can look at. Surprisingly, you may see a contract that allows a subcontractor to get an extension for all things beyond their contract. That is pretty broad and very surprising to see in a contract.
Does it say ‘...or events beyond your control?’
That is a provision that may exist in your contract. You want to see if it exists and if so, you can argue that these price escalations are beyond your control. Another provision to look at is a change of laws.
Change of laws
Some contracts say that you are allowed to make a claim for time and money if there is a material change in the law. For example, there is a subcontractor doing work on a set-aside contract, so they have to comply with the prevailing wage.
Changes in prevailing wages
The prevailing wage for one of the scopes of work went from $16/hour in 2021 to $38/hour in 2022. Well, they budget a $5 increase, not a 100 percent increase in the wage which effectively results in a several hundred-thousand-dollar loss for them on the project because of the amount of work and this prevailing wage increase.
Plus all the other increases. A look through their contract results in a change in law provisions that says any material in the law may allow you to make a claim for time and money. So they submit their request for extra time and extra money based on this change in the law which is the change in the prevailing wage rate for some of their scope of work.
e. Other issues to look at
What does your contract say about change orders and claim procedures? You need to make sure that you look at this section because what we talk about now effectively constitutes either a claim or a change order because you are going to ask for more time and more money.
ii. Can you tie any of the escalation to new work?
Can you tie any of this escalation to new work? That is the easiest way to try to make a claim for more money and more time is if your scope changes, and as a result of your scope changing, you can try to get more time and more money.
iii. Can you fall under the ‘claim’ section of the contract?
If all else fails, some contracts have a claim provision that says if you want to make a claim for time and money for any reason, you need to follow the terms of this section. So you need to find that section and follow the terms.
Typically, it provides notice in writing to them within 48 hours, 72 hours, or 7 days with all the backup for the claim. Usually, your recovery is tied to being able to (i) prove your claim, and (ii) the contractor getting paid by the owner for your money. So it is tied to someone else paying so that they can pay you.
Other than that, you need to seek legal counsel because you are going to probably have to get pretty creative.
For example, there may be a factually interesting scenario. That is what you have to look for. Are there unique facts or circumstances around your situation that can give you a hook to make the claim.
In the example mentioned above, the construction contract is signed in the middle of 2020 with an estimated start date at the end of 2020, and a completion date at the end of 2021. The client signs the contract, issues the bond, is just told to wait, and that someone will get back to him.
A notice to proceed is issued and it is currently May of 2022. Eight months have passed since the job was supposed to have been completed, and it has not even started. If the client were to start this project today, they would suffer about a $600,000 loss based on the price escalation of their construction materials associated with this work.
So what you are doing is argue that the contract is effectively void. Because the time period associated with the work has come and gone. It has not even started, and it is not reasonable to expect someone to hold a price for effectively almost two years.
So you should cancel the contract, send a letter canceling the contract, and talk to your surety to make sure that they are on board. You want them to stand with you because you suspect that when you terminate this contract, they are going to make a claim on your performance bond for your unilateral termination of the contract.
You need to get your ducks lined up so that when you pull the trigger, you have done all the preparation you need to. That is an example of a situation that does not fall quite within any specific contract provision but is unique to the facts that are presented.
f. What about vendors not honoring prices?
The other thing that you will see a lot of is vendors, material suppliers, and manufacturers not honoring their prices. So what can you do about that?
i. Was your price in writing?
Was the price in writing, do you have a firm quote from your material supplier or vendor and the question is, “Is it firm?” meaning is there any exculpatory provision in their contract in their quote to you?
Many times you will see orders placed on the phone, via email. So there is no price; you get a rough quote from the concrete supplier so that you can generate a bid. And then when you go to order. Bow the price is 10%, 20%, or 30% more. You do not really have a quote if all you did was get a price from them, what you need is you need them to give you a price that says this price is good for this period, for these materials.
That at this point is probably next to impossible. Most manufacturers (i) do not give price quotes with any duration on them, and (ii) seeing that they are saying that the price they tell you is just an estimate, the price that it is actually going to be is the price when you ship.
So if someone orders today and you ship in a month, it is not today’s price, it is the price that exists when you ship the project. That is what you are going to be able to honor and nothing else.
ii. Can you sue them to force them to honor the price?
Now, you can sue them if you have a written price quote. That is firm but do you really want to do that?
iii. Will they cut you off?
They are probably going to cut you off.
iv. Can you get substitute materials?
And you may not be able to get substitute materials for any less money.
Material suppliers may renege on contractors, on the firm prices that they got. For example, a very large shell contractor receives a firm price quote that gets them through the middle of 2022. In early 2022, they receive an email from the concrete supplier that says the price is going up.
They are called and told by an attorney about the quote, they say that they do not care, and they say to sue them if the supplier wants to. But if they do not accept or do not agree to pay the price increase, the supplier is not going to provide concrete.
Everyone else is on allocation, so they are not going to be able to give concrete either. The supplier’s price currently on the street is more than their price to the contractor even with the price increase.
This would put anyone in a very difficult position. As an example, in the situation described above, the contractor made the very difficult decision to suck it up because he had no choice. He had no place to get alternate material, and even if he did, that material was substantially more expensive than the price that he was getting with the price increase.
So keep all of those things in mind as you deal with this problem.
v. What is next?
What is next?
v. Know that to switch providers is costly and will delay the project
You can switch providers, vendors, subcontractors or general contractors, but that is going to affect the cost of materials and the schedule of the project.
vi. New prices, if they can get them, will be much higher than your ask
If you can get new prices, they are probably going to be higher than what anyone is asking you to pay now.
For example, there is a large general contractor, and they are about 20% of the way through the project. Now, their subcontractors go back to them and say they can’t honor their subcontractors’ prices.
It is a 75-million-dollar project. So it results in about a $7 million price increase on the project. The subcontractors tell the general contractor to sue them because they are not going to lose money on this job, and to do what the general contractor has to do, but they are not honoring their price.
So that puts the contractor in a difficult position but what the contractor has to know is that the owner is not any different than people usually are with their subcontractors. If the contractor goes to the owner, tells them that they are dealing with this problem, that they want to work it out, but tells them that if they cannot work it out, that they are going to have to walk off the job.
What is that going to do? That is going to cause you to have to go get another contractor who is going to charge you even more than the previous contractor was going to charge you, even with a negotiated price increase. It will severely impact your schedule.
vii. This is not renegotiating the contract, but..
What you will see in general is a significant renegotiating of contracts that technically should not happen. A contract is a contract and legally, you may be able to win in a court case. But what good does that do for you in your project if you are not actually able to finish it?
g. If you are requesting an accommodation
Now we will talk about the act of requesting an accommodation.
i. Send a request in writing asap
You need to send that request in writing as soon as possible.
ii. Provide the backup
You need to provide the backup with supporting documentation of what you are asking for and why you are asking for it.
iii. Include written proof of bid price from vendors and current price from vendors
You need to include written proof of the price that you got when you bid for the job and the price that you are currently receiving from your vendor. What you will see is that when you submit a request for a price adjustment, an accommodation, and they are not providing all of that backup.
If they are getting any price adjustment, it is substantially worse than if they had all the backup to support the fact that they did what they could at the beginning of the job to get a price. And now it is substantially more.
Below is a sample letter that you can use to try to make a price adjustment request.
That is a sample letter that you can use and tweak as you see fit to make a request for a price adjustment to the extent that you have specific contract provisions that you can cite to support your request, you want to go ahead and do that.
h. Barring specific contract provision to support escalation, people get 0% to 50% of request
Typically, people get between zero (nothing) and 50% of their request. It is rare to see people get all of their requests. But generally speaking, a third to 50% is what you will mostly see people receive.
i. Success rate is higher on private projects, lower on public projects
You will see success rates higher on private projects and lower on public projects.
j. Most projects have contingency – ask to have your request fall into the contingency
Remember that almost every job has a contingency, and that contingency is low-hanging fruit for you to the extent you make a request for adjustment early. So you want to submit your request as early as possible so that if there is any contingency, you can fall within it.
k. Know that threatening to stop work may be a default of your contract
A few things to keep in mind know that threatening to stop work on most projects under most contracts is a default in and of itself.
l. If you are bonded, they could call your bond
You have to be very careful about telling people that you are not going to continue to work, threatening that you are going to walk off a job threatening that you are going to terminate the contract, so be very careful if you are bonded as mentioned before. They may call your bond.
m. Do not forget about time extensions in your request
Do not forget about asking for time extensions. Not only are you dealing with a price issue, but you are also probably dealing with material delays in shipment and delivery. So make sure that you submit that request not only for money, but for time.
n. Comply with all time and notice requirements of your contract
Your contract has a claim and change order process. Notice in writing is typically required within a certain amount of time so you need to make sure that you are complying with all of those other notice and time requirements of your contract.
o. If you make a claim, carve it out of your release until it is approved and paid
If you do make a claim, maybe based on the letter above, or a change order request, that is pending, you sign, continue to work, still receive payments, and sign releases, you need to make sure that you carve out those issues – those pending claims from your release. Because if you look at most releases, you will see that when you sign a release, you are releasing all of your rights prior to the through date.
So if your claim existed in March of 2022 (when you submitted your letter), and now you are in April, May, June, and July and being asked to sign releases in each of those months, you need to make sure that you have a carve out that says ‘this release excludes the claims submitted on Match 15, 2022’ or ‘PCO number 14, 17, and 19.’
You need that exclusion so that you are not releasing your request just when you sign a release.
Use the SunRay System to Generate, Customize, and Store your Releases
In the SunRay application, you have the ability to create your progress payments and your final payments. All of the forms you use are statutory forms. If you are a SunRay customer, you can go in and under ‘Action Items,’ you can see the action items.
Click on ‘Waivers and Releases’ of Liens under ‘Common Actions.’ Select the required Waiver or Release document type from the dropdown and click on ‘Add.’
You have three options you could do, which includes the Sworn Statement of Account, Waiver and Release of Progress Payment, and Final Payment.
All you have to do is enter in your details. Select the required Waiver and Release document type from the dropdown and click on ‘Add.’ Your project details are auto populated. Provide any missing/required details and click on ‘Create.
You can download the generated waiver/release in PDF or MS Word format.
It takes no more than 25 seconds. Your actual waiver will appear, and the system will create a PDF or a Word document. You can add your logos to your waivers and releases, and you can actually save all of your notarized and signed waivers and releases.
Interestingly enough in the state of Florida, it is not a statutory requirement to have waivers and releases notarized and signed, however, everyone loves that official stamp, and you can save them all in the SunRay application.
Dealing with New Contracts
Now we will discuss what to do with your new contracts – contracts you have not yet signed.
a. You need to add an escalation provision to all new contracts
Obviously, you want to make sure you add some type of escalation provision to your new contracts.
b. Consider both dollars and time in your provision
You want to consider both dollars and time. One of the things that a lot of people deal with is that even if they are willing to absorb the cost increase associated with a certain item like a piece of material or equipment, it takes a long time to get them.
For example, there is a contractor who is getting custom mill work and normally that is an eight-week lead time. Then, the manufacturer of this millwork tells them that it is 17 weeks. That is significantly affecting this project.
So even if the contractor has no problem paying the cost increase, the time is a significant component.
c. Even if your vendors ‘locked in’ their prices, you should still have an escalation provision
So you want to make sure that your cost escalation provision deals with both getting more money and getting more time.
d. Sample subcontract-friendly provision
Sometimes a contractor will think they have a firm quote from their subcontractors or their vendors. They think that they have the ‘prices locked in.’ So, one of the things you should consider is the example mentioned above, which is the idea that people are just walking away from their contracts.
Even though they may have signed a contract and you have them in quotes locked in, they may decide that the prices continue to go up, they are not going to deal with it anymore, and that they are just not going to do the job.
So you have a written contract that says they have to honor their price. But they are not going to honor it so now you have got to go back on the street and try to find someone else to give you that product.
It is going to take more time and cost more money. So even if you have vendors that have locked in your price, and you feel really good that it is not going to change your contract with your customer, you should still have an escalation provision.
Below are two sample scalation provisions that look at this issue from two different sides.
If you are a subcontractor with a contractor, or you are a contractor with an owner, this is a provision that is good for you and that you would like to have in the contract that you sign with someone else.
Take a look at this first provision below:
This is a very favorable escalation – but there is a catch.
i. This is very one-sided and will never be accepted as drafted
It is highly unlikely that anyone will accept this as drafted because it is so one-sided.
ii. Starts a conversation to negotiate the scope of escalation
What is important is that it starts a negotiation and discussion with the other side that price escalation is real, and you need to deal with it in this contract.
Maybe it is not five percent, maybe it is ten percent. There are ways to tweak that provision to make it more fair. But if someone asks you to provide them with an escalation provision, and you want one that is good for you, that is really good.
iii. Consider adding other items like freight, fuel, and storage
Now this is very general, but depending on what you want, you may decide that you are going to narrow the price escalation component to different things. Do not forget about freight, fuel, and storage.
If those are big components of your business, then you need to make sure that you get them into the price escalation request and subcontract provision.
iv. Sample contractor-friendly provision
Let us take a look at a contractor or owner-friendly escalation provision where you want to put an escalation provision in, but you want it to be good for you with the people that you are hiring.
So if you are a general contractor, this is what you want in your subcontract for example.
Just like the first provision shown above, this is just as one-sided on the other side. This is not impossible. It is nearly impossible for a subcontractor to jump through all of these hoops to satisfy the price escalation requirements. On top of that, a 25% increase item by item is also a very difficult threshold to overcome.
That means for example, if drywall goes up 23% you get no price escalation. If steel pipe goes up 27% and you do not get 27%, you only get the 2% which is the 2% over the 25%. So you should be careful when someone tells you that they are going to give you a price escalation provision that it actually can be achieved.
For example, there is a large general contractor in town who gives a plumber a price escalation provision. The plumber asks an attorney to read it, the attorney reads it and says it does not sound like he is giving him anything. It is written in a great deal like the one above, and it is true.
You might as well not have an escalation provision in your contract if that is the one you have to live with. So be very aware of what it is going to take to actually get a price increase.
e. Each provision can be altered for owners, general contractors, subcontractors, etc.
Note that each of these provisions can be altered, changed, or modified. You can come up with any scenario or strategy. You want to try to come to an understanding.
f. Other ways to solve the problem
What you will see is that there are some other ways that this problem gets solved.
i. Buying materials now and storing them
When possible, some people may buy materials and store them.
Keep in mind that that is problematic because you have to deal with double and triple handling. You have to deal with insuring and making sure that there is insurance for this material wherever it is stored. You have to pay for storage. What if it is stolen? What if it catches on fire? What if it is vandalized?
Who is going to bear all of those risks of loss as this material is waiting around to be installed. What about the warranty associated with any material and equipment associated with purchasing now and storing it for a long period of time. None of these are insurmountable issues. They just have to be addressed and dealt with.
ii. Getting more money and owning the risk
Other ways you will see people deal with this are getting more money and owning the risk. You will end up speaking to people who say they do not know whether things will last forever. Someone may say that they feel the price of lumber is going to come down or the price of drywall is going to come down.
So they may tell the individuals who hire them that they are going to go ahead and increase the price by 5% but they are not going to have an escalation provision. They may say that they are going to own the risk and end up doing just fine.
So depending on how risk tolerant or averse you are, you may decide to ask for a little more money at the time of the contract, and not get an escalation provision.