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Ask an Attorney: The Construction Industry Economic Forecast & Contractor Agreements: How Economics & Law Fit Hand-to-Glove

By: Michael Metz-Topodas Esq., Cohen Seglias Pallas Greenhall & Furman PC

Earlier this year, economic forecasters throughout the construction industry weighed in with their assessment, analysis, and even projections for 2022. In February, ABC Keystone hosted Anirban Basu, ABC National’s Chief Economist, and possible secret agent, to give his industry outlook at the annual Economic Breakfast. His presentation not only reviewed and interpreted key metrics, but it also had implications for day-to-day business activities. As economics and law go hand-in-hand, the emerging economic landscape drives how contractors should negotiate their contracts and the types of terms they should include.

ABC Keystone’s 2022 Economic Outlook Breakfast with Anirban Basu, ABC Natinal’s Chief Economist

Basu’s talk conveyed a theme common among industry forecasts: lingering uncertainty with a dash of optimism. Owners’ desire to complete projects means industry growth will continue but not without perpetuating some drawbacks: demand outpacing supply, increased labor costs, and inflation across all sectors. All of these will impact day-to-day project construction in two all-too- familiar ways, supply chain-related delays and price escalations. Rather than accept the project losses these developments will likely create, savvy contractors can structure their written agreements to share this risk with others invested in a project.

Material Delays
Judging by conversations among contractors at the Economic Breakfast, many continue to confront difficulties in the availability and delivery for materials and specialty products, which lead to project delays. Compounding these problems with getting materials, a limited workforce makes keeping to a project scheduled almost impossible. Typically, contractors bear the risks from these challenges, but the present degree of uncertainty justifies sharing or spreading that risk across project stakeholders.

Shortages and uncertain lead times for materials and products often affect all contractors relatively equally. For example, if one electrician is struggling to obtain electrical metallic tubing, likely they all are. As a result, a general contractor or owner will likely have little success trying to shop around—either during bidding or even after a project has begun—for a better deal from one contractor to the next. Such leverage helps contractors protect themselves from materials delays and associated risks by successfully negotiating underlying key contract terms.

To address the current supply-chain issues, standard force majeure clauses usually do not suffice. Typically, they do not expressly list unexpected long delivery times or unavailability of materials as covered force majeure events. So, contractors should seek to add such items to their agreements to remove any uncertainty that delivery and availability problems receive treatment as delay events beyond the contractor’s fault and exempt from any no-damages-for-delay clauses. Contractors should also negotiate terms regarding materials substitutions to ensure that owners or general contractors cannot seek delay damages when a contractor offers a reasonable substitute for a currently unavailable product. Contractors should also seek language that bars owners or GCs from recovering delay costs when they reject reasonable schedule modifications for unforeseen materials delays or long lead times. Along those same lines, contractors should seek express language that would excuse delays resulting from owner or general contractor taking too long to review and return submittals and allow a contractor to recover resulting costs.

Price Escalation
Similar to materials issues, contractors can distribute the risks from ongoing dramatic price changes by negotiating for price escalation provisions. Although such clauses come in almost endless varieties, they typically establish criteria under which the owner or GC agrees to pay an increased contract price due to a rise in materials costs. For example, a clause may require that should any material price rise during the time between execution and performance by more than 10%, the GC would compensate a portion of the subcontractor’s actual increased lumber costs. Other provisions tie escalations to a specified price index for a specific product or other common, publicly recognized industry metric. Some contracts even allow escalation for any price increase regardless of amount, but subject to approval under the change order process. As these examples illustrate, price escalation clauses often require detailed and precise language to establish the exact conditions and terms for adjusting the subcontract price due to materials escalation costs. Parties should proceed carefully during subcontract negotiations to focus on finding the best arrangement that fits the project’s circumstances.

Conclusion
These general guidelines provide the goals of contract negotiation rather than the final terms. Those come through careful discussions among all parties and after careful consideration of the project’s unique features. Experienced counsel can ensure the final agreement’s language accounts for those issues and project characteristics so the final written contract reflects and carries out the parties’ intended arrangement. Further, counsel can coordinate modifications to force majeure, delay, submittal, and delay clauses with all other contract language to prevent any conflicting or ambiguous language.


Michael Metz-Topodas is a partner at Cohen Seglias Pallas Greenhall & Furman PC. As a construction litigator, he represents general contractors, subcontractors, owners, designers, and suppliers through all stages of private, public, and federal projects. Michael helps clients navigate construction project disputes, including delay and inefficiency claims, design and construction defects, unforeseen site conditions, project scope disputes, and payment claims. He can be reached at: mmetz-topodas@cohenseglias.com


Posted April 28, 2022