Since the beginning of the COVID-19 pandemic, construction material prices have risen dramatically — factories that were cutting lumber and producing other materials were shut down, working at a reduced pace, or otherwise hamstrung. Despite this, construction projects have continued unabated throughout much of the country, forcing supply chain economics to the forefront (Exhibit 1).
The increase in costs of materials can lead to project budgets being shattered and owners and contractors disputing which party is responsible for absorbing the increased costs. As is often the case, the answer as to which party will bear the expense is usually found in the provisions within the construction contract itself — and whether the contract even has an escalation clause.
For years, escalation clauses in construction contracts were ignored and viewed as extra unrelated verbiage, and many certainly ignored the one contract clause that could be the savior of contractors regarding material cost escalation — force majeure clauses. This article will review why contractors should be using these provisions in their contracts and some best practices for adding them.
While the cost of materials under a contract is a basic provision, there are different ways to handle them.