Construction Cost Impacts Post COVID-19: Cost Escalation and Delay

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Snell & WilmerThe current state of the construction industry as it concerns cost escalation and supply issues is one of uncertainty and time of performance problems resulting in increasing costs. There are major disruptions and delays in the supply chain, COVID-19-related labor shortages, clogged shipping ports and shifts in demand. For example, there is an exploding demand for residential projects coupled with a historically low inventory exacerbated by historically low interest rates.

In these unpredictable times, certain considerations should be looked at to address cost escalation and delay. Many are familiar now, due to COVID-19 experience, with force majeure contract provisions having been invoked; and for a while these clauses were the topic of the day to discuss, after being largely dormant. However, today, almost two years into the “pandemic,” mnCOVID-19 impacts are unlikely to be considered a surprise and contractors and owners should expect the unexpected when it comes to COVID-19.

So how should you deal with the reality of cost escalation and supply chain interruption or delay? Step one, as always, is to look at your contract since it may instruct the parties regarding how to deal with such circumstances. Specifically, look for whether the price of work can change and who bears the increased cost. Some key language to look for is the ability to make or claim an “equitable adjustment” in the contract price or time for performance. You should carefully evaluate where the project is located and what new COVID-19-related governmental regulations affect your project in terms of labor issues or time of performance. There may be contract provisions that allow increased cost recovery or time extensions if there is a change in the law or regulation.

You may want to consider an expanded use of contingency funds in your contracts. By contingency, I mean the amount of money set aside to address unforeseen costs. Many contracts have boilerplate contingency language, but this may be insufficient, or worse, create uncertainty. In the current environment, you may want to list contingencies for increased costs for labor, materials, etc. You may also want to tie the contingency to cost indexes and set benchmarks triggering the access to contingency funds when a certain cost escalation threshold is exceeded. Also, to assure a fair apportionment of the use of the contingency between the parties, you may want to consider a cost sharing arrangement mechanism for unused contingency.

Being forewarned is being forearmed. By now, everyone in the construction industry should be aware of COVID-19 impacts, supply chain issues, delays in delivery of materials and general disruption of projects which increase both time and cost. You may want to address the anticipated cost volatility head on in your negotiations, bid or price proposal and ultimately in your contract. To do this you may need to: (i) identify specific items anticipated to be subject to volatility; (ii) choose a pertinent market index that you can use as a benchmark to price a commodity and track its cost of installation; (iii) tie your bid or price proposal amounts to a market index date and price; (iv) agree on the threshold for activation of any price adjustment; (v) adjust prices up or down based upon changes in the index so the risks are shared equitably; and, (vi) fairly allocate risk so that no party is making a big gamble regarding pricing or time of performance.

Owners may want to use limited notices to proceed particularly with respect to the ordering of long lead time items to procure as well as price volatility in certain commodities. At the outset of the project, these elements can be identified and acted upon in an expedited fashion to reduce an adverse impact. Finally, contracts should generally be drafted tight enough not so as to excuse untimely performance in securing orders for performance. While ongoing disruptions from COVID-19 19 are real and legitimate, it would likely be imprudent to enter into a contract where COVID-19 19 simply becomes a “get out of jail free card” to excuse incomplete or negligent performance.

In conclusion, these are challenging times which require review of your contract documents to consider the current environment. Relying on the same old form contract, even if adjusted for certain COVID-19 19 elements, may need another look going forward. These cost escalation, supply chain and timeliness of performance issues and the consequent of COVID-19 19 are probably not going away in the short run.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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