Materials costs are skyrocketing! The obvious resulting dilemma with a fixed price contract is if the contractor must absorb these increased costs and cannot change the total contract price, the project could become unprofitable. We have fielded many recent requests concerning what homeowners can do when they are a party to a fixed price (“Turnkey”) construction contract, but their contractor wants to cancel the contract because it is facing significant and unpredictable increases in costs of materials. This seems to be yet another pandemic driven supply and demand issue.
Generally, the costs for lumber, steel and even concrete have risen anywhere from 200% all the way up to 800% depending on when it was purchased. So, at this point, the inflationary volatility of the market is well known, and contractors should be including clauses in their contracts that provide for escalation of materials costs. However, at this moment, for either a contractor or homeowner entering a fixed price contract, they should proceed with extreme caution. The certainty of the “fixed price” is no longer guaranteed.
As always, first step is to review your contract. What does it say about escalation of materials costs? Some well drafted contracts have very specific sections addressing this very issue. The following is an example of part of one such clause we have seen:
If there is a price increase in the cost of any construction materials that exceeds 5% from the average of similar materials purchased/priced by the Contractor in the preceding 30-day period from the execution of this Contract, the excess charges will be passed through to the Owner, resulting in an increase in the total contract price.
Unfortunately, while a “30 day” price lock on construction materials used to be common, these days a contractor may attempt/need to shorten this period to 15 days or less. Of course, if you must charge more to the homeowner on a fixed price contract based on an escalation of materials cost, you will likely be changing the total contract price. This may not ultimately hurt the contractor’s bottom-line, if it can pass along the increased costs to a homeowner, but of course this creates havoc to the homeowner’s budget or even their construction loan and/or appraisal. Under such a circumstance, it should not be surprising that the contractor-homeowner relationship may become uncomfortable, at minimum, or even adversarial.
One way to address this may be to look at how the budget is allocated. Neither side wants to scrimp on quality materials, but perhaps other adjustments can be made within the original budget. This may not be ideal, but it is as least one option to keep the project on track and maintain a good working relationship, because the escalating costs are a market condition not under the control of either party. If the homeowner terminates based on price escalation, they will not be finding it cheaper unless it is a scam (watch out for those “good deals.”)
Escalating costs is not a completely new issue, but it certainly seems more problematic and widespread recently. If you are in a situation where you need help evaluating whether your contract has any provisions that may be helpful or to pre-mediate a dispute, it is probably a good idea to contact a competent attorney who is experienced in construction law. Feel free to give us a call. We would be happy to help you.