Increased Material Costs Leave Contractors Asking about Contract Protections

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Davis Brown Law FirmWe are hearing about a budget pinch from many homebuilder and general contractor clients tied to the substantial increases in the cost of lumber and other materials; HBA Iowa reports about an 80% 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 see if they have options to get some or all of the increased costs covered by the owner and consider revising their future contracts to help protect themselves against abnormal material cost increases.  

Cost-Plus Contracts

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, 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 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 virus took hold, many buyers reconsidered their project - putting the project on hold or delaying decisions as they dealt with the health and safety of their families. If your contract contains this type of provision and you can show that without that delay, 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 one or more of the following provisions in your stipulated sum contracts?
    • Provision RE: Market-wide Material Cost Increases: Generally, this type of provision provides that the contract price is subject to change if there is an unexpected market-wide increase in the cost of a certain material above X% (often 10% or more) and if the contractor cannot obtain the same or similar material for a lesser amount; in such event, the contract price is subject to increase in the differential amount of the material cost increase.
    • Price Lock Provision: This type of provision mandates only a 30- or 60-day price lock guarantee, such that the contract price is subject to increase at the commencement of the project does not occur until after that price lock period.

These two provisions should help contractors and builders with future substantial material cost increases in the future, but contractors should ensure that their owner-clients understand the effect of these types of provisions.

Finding Relief

We 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 - low supply and high demand and the ongoing trade war adds other layers to the issue. Ask your members of Congress to work with the administration to address lumber prices.

Going Forward

Coronavirus continues to teach us new ways to move forward. For builders, this includes adding contract provisions to address everything from government forced shutdowns to material cost changes. Builders are encouraged to work with their attorney to address contractual changes going forward to avoid being on the hook for these massive cost increases.

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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