The building material costs have risen significantly this year. Who should bear this risk and how can the various contracting parties reduce this risk?

Owners, contractors, subcontractors and suppliers have historically taken different perspectives in controlling the risk of material price increases in construction projects.

An owner’s position is that prices are fixed after the contract is signed and that increases must be limited to signed change orders. Downstream contractors, subcontractors and suppliers will argue that any unplanned event or condition that results in increased costs is a basis for an additional charge. Until recently, the risk of such unexpected material price increases was relatively rare, so construction contracts often did not address this risk directly. The volatile increases in the price of building materials in 2021 have once again shown how important it is to take potential price increases into account when negotiating building contracts.

Many downstream contractors, subcontractors, and suppliers faced with unexpected material supply costs attempt to pass them on to the owner or upstream parties by filing Force Majeure or a major change event. However, an owner faced with such unplanned costs will categorically reject such claims unless addressed directly in the contract. Neither of the legal theories would typically apply to a product price increase. The result is that legal battles will likely arise to resolve such unexpected circumstances.

A better approach is for all parties to recognize potential volatility in material price increases and negotiate a mutually acceptable escalation clause. Factors in such an approach should include an analysis of the following:

  • Can certain materials be identified that are likely to have volatile prices in the short term?
  • Can a common understanding be reached on what constitutes volatile prices (ie 5% over 30 days or 30% over 180 days)?
  • Can contractors or owners identify suppliers who offer fixed prices for certain materials for a certain period of time?
  • Can materials be ordered at the start of the project and stored on site or at an approved off-site location until needed?
  • What is the overall potential impact on contract prices?
  • Can the use of a contingent line item be used for unexpectedly fluctuating prices?
  • Can the parties agree to provide benefits to an owner when material prices go down?

Owners, contractors, subcontractors and suppliers should take these aspects into account when negotiating agreements. Price escalation is unlikely to go away anytime soon. As with many problems, open and honest communication is often critical to a good working relationship, and addressing this problem before starting a project can help avoid litigation at the end of a project.