Construction material price escalation can result in claims

Once again, economic factors have been pushing up the price of construction materials. In some cases, the increase means the costs of materials are soaring, and that means that construction contractors and subcontractors who submit a fixed-price bid are subject to the impact of escalating costs due to material shortages, snarled supply chains, continued tariffs providing record profits for domestic steel, copper, and aluminum producers, caps on lumber imports, and other factors beyond their control. However, the risk is not only for those performing the work on projects. With material price escalation, the risk can reach back to design teams.

Materials often represent half or more of the cost of a fixed-price contract. Unanticipated increases could easily wipe out the construction team’s profit and create severe financial hardship for contractors and subcontractors unless they can pass on the added costs. In some cases, project owners recognize such conditions and provide greater flexibility in contracts through cost-sharing arrangements. Rather than holding a contractor to bid prices when costs are fluctuating, some project owners are agreeable to contract time and contract price alterations caused by specific supply chain interruptions, unanticipated government interventions, or unforeseen price escalations. Construction contracts might also accommodate other increased costs, such as from delayed deliveries or increased sanitation and protective equipment on construction sites resulting from pandemic impacts or regulations. Usually, other increased expenses, such as for fuel, replacement labor for ineffective construction workers, and other operational costs that could delay projects or disrupt construction budgets, are not contractually recognized.

Design teams on projects affected by pandemic costs, material price increases, or completion delays out of the construction team’s control often are the targets of cost recovery efforts. Any delay in a project costs money—usually for the construction team and certainly for the project owner—and the owner will bring a claim if they can trace that delay and the resultant costs to a contract breach or professional negligence by the design team. 

Increased costs could result in contractual or professional liability claims in other ways. Designing to the project owner’s budget might not be achievable when material costs increase rapidly. If a standard AIA owner-architect agreement is used, increased material costs that cause a budget-busting design could mean free redesign effort if contractually warranted. The AIA language on redesign states that the architect is paid for redesigning to meet a modified budget “if the Owner’s budget for the Cost of the Work at the conclusion of the Construction Documents Phase Services is exceeded by the lowest bona fide bid or negotiated proposal.” The owner has the option to “revise the Project program, scope, or quality as required to reduce the Cost of the Work.” If the owner chooses to do so, “the Architect shall modify the Construction Documents as necessary to comply with the Owner’s budget for the Cost of the Work at the conclusion of the Construction Documents Phase Services, or the budget as adjusted.” 

In a normal construction environment, “if the Owner requires the Architect to modify the Construction Documents because the lowest bona fide bid or negotiated proposal exceeds the Owner’s budget for the Cost of the Work due to market conditions the Architect could not reasonably anticipate, the Owner shall compensate the Architect for the modifications as an Additional Service.” However, in an economy where everyone in the industry should be familiar with the volatility of material prices and the resultant construction cost escalation, it is likely that the architect will not be paid because “otherwise the Architect’s services for modifying the Construction Documents shall be without additional compensation.”

There are other dangers to design firms when construction costs rise. One is that if the design team causes a project delay or requirement of corrective construction through its negligence, the inflation in material prices means that the claim for remedial work could cost more. Another is the general dissatisfaction of the project client with the design firm’s services, and dissatisfaction often leads to allegations of negligent performance of professional services.

During times of price volatility, it is incumbent on firms to reinforce their risk management practices. That emphasis could include the following:

  • Inform clients that it is impossible to predict increases in the costs of materials or systems.
  • Educate the project owner that holding a contractor to a fixed-price bid that is unrealistic could be counterproductive.
  • Check the material price escalation provision in the construction contract for compatibility with the professional services agreement.
  • Avoid contracts that require redesign for no fee if the design professional should have anticipated budget-busting.
  • Include a standard waiver of consequential damages provision to limit liability for project delays because of cost escalations or supply disruptions.
  • Be wary of contractor-requested substitutions that now, more than ever, are caused by cost-cutting.
  • Recognize during site visits any contractor efforts to cut material costs in a way that could affect construction quality.
  • Work with the project client to solve problems quickly, including any disputes about possible fault that led to a delay.

With price volatility common, materials in short supply, and inflation increasing, design firms have to be especially sensitive to project owner cost sensitivity and the impact that underpriced projects can have on their contractual and professional exposures.

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