The Coronavirus has caused many material shipments to be delayed or cancelled. As a result, the cost of ordering and supplying materials for many items has increased. How can a contractor protect itself from labor and material price increases on a project? The contractor should consider adding additional terms to its contract to protect it from labor and material price increases. The contractor’s contract should include a price acceleration clause which consists of the following:
If there is an increase in the actual cost of the labor or materials charged to the contractor in excess of 5 percent subsequent to making this agreement, the price set forth in this agreement shall be increased without the need for a written change order or amendment to the contract to reflect the price increase and additional direct cost to the contractor. Contractor will submit written documentation of the increased charges to the prime contractor/owner upon request. As an additional remedy, if the actual cost of any line item increases more than 10 percent subsequent to the making of this agreement, contractor, at its sole discretion, may terminate the contract for convenience.
The Big Three
There are three components to the price acceleration clause. First, the price acceleration clause provides that the contractor may adjust the contract price to reflect the revised actual cost of the labor and materials. Generally, assuming the contractor is using its own labor force, there should not be a significant enough increase in labor costs to warrant an adjustment of the contract. As a result, the price acceleration clause is primarily limited to increases in materials over the course of a project.
The second component of the price acceleration clause is providing the prime contractor or owner with documentation supporting the claim for additional compensation. By doing so, the contractor is providing the prime contractor or owner with evidence of the increase in the actual cost.
The third and final component of the price acceleration clause can be a termination for convenience provision if the price of any single item increases by more than 10 percent. Although disfavored, a termination for convenience clause may allow the contractor to escape a contract if the cost of materials has increased exponentially or the materials themselves have become difficult or impossible to find. Generally, this last component is removed because of the uneasiness prime contractors and owners have with the idea of a termination for convenience.
Think a Few Steps Ahead
A subcontractor may find it difficult to include the price acceleration clause in a contract with a prime contractor because both the owner and the prime contractor are looking for fixed prices prior to the start of the construction. In that situation, the subcontractor may buy and store materials prior to the start of construction to avoid increases and may request a deposit to purchase the requested materials depending on the nature of the job.
To the extent that a contractor adds a price acceleration provision to their contract, the contractor should consider requesting that the prime contractor add a similar provision in its contract to allow the prime contractor to seek additional funds from the owner for any labor or price acceleration that occurs.
Contractors should also use common sense with regard to providing firm bids for contracts during the Coronavirus pandemic and insert a variety of contractual protections to address delay and suspension. Under those circumstances, the contractor faces additional exposure to the increase in the cost of labor and materials. Therefore, estimating those jobs appropriately can make or break a contractor.
Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.