By Lea Nobles
COVID-19 has vastly impacted the global supply chain, including the cost of materials in the construction industry. Since 2020, construction contractors have found themselves facing increased costs on several key materials, including copper, structural steel, and lumber.1 For instance, prices of lumber and structural steel have increased up to 300% and 250%, respectively.2 These increases have caused many construction contractors to experience monetary loss and damages arising out of the purchase of materials for jobsites.
Consider the following scenario: an electrical subcontractor submits a bid to complete electrical scope of work on a jobsite. The price of copper increases drastically after the bid submission and before accepting a contract. The contract price, based on the bid price, no longer adequately reflects the price of copper needed to complete the job. In these instances, the subcontractor is often forced to pay the difference of the increase in material costs out of pocket.
Because a subcontractor is generally responsible for acquiring materials for their scope of work,3 it is important that subcontractors have terms in their contracts that allow for additional monetary compensation to account for increases in the cost of materials. This article suggests that subcontractors should include an atypical force majeure clause in their contracts to further protect themselves from increases in the price of materials.
It is first important to analyze whether the price increases constitute a force majeure event. Force majeure clauses create a defense for nonperformance or delay arising out of “acts of God.”4 Such events are typically unforeseeable and uncontrollable by all parties to a contract.5 Given that no party has control over the material price increases, it could be argued that the changes in price would qualify as a force majeure event. The counterargument, however, is that because these increases have happened continually over the last two years, then they are foreseeable and, therefore, not do not qualify as a force majeure event. Thus, it is essential that the force majeure clause explicitly allows monetary compensation for material cost increases.
Traditionally, contractors have difficulty receiving compensation for force majeure events.6 This is because most force majeure clauses allow for an extension of time in the face of project delays, with no mention of compensation as a remedy for a force majeure event. Departing from a traditional force majeure clause, a clause should be drafted to include compensation as a remedy for force majeure events, and explicitly include price increases as a compensable force majeure event. Below is an adaptation of section 8.3.1 of an American Institute of Architects (AIA) contract. AIA contracts are drafted and negotiated to reflect the interests of all parties to a construction contract and are commonly used as a standard contract in the construction industry. In its unedited version7, this clause does not allow for additional compensation. The following clause, however, is an adaptation of section 8.3.1. Added verbiage is indicated by bold, underlined, and green typeface,8 and deleted verbiage is indicated by bold, strikethrough, and red typeface.9
If the Contractor is delayed or suffers damages at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unusual increase in cost of materials, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay or reasonable damages, then the Contract Time shall be extended for such reasonable time and the Contractor shall be compensated for reasonable damages arising out of such events as the Architect may determine.
It is important to note the inclusion of “reasonable” when describing the type of compensation allowed. This language ensures that the contractor must take reasonable steps to attain the lowest possible price when purchasing materials. Therefore, a contractor may not recover for a price increase if the contractor negligently waited to purchase materials, despite having an executed contract for the work. Thus, the inclusion of the term “reasonable,” while slightly disadvantageous to the buyer, serves as an important negotiating tool. This verbiage serves as a protection for the general contractor against a subcontractor’s negligence, and therefore makes the clause more agreeable to general contractors and owners.
It must also be noted that if general contractors include these terms in their subcontracts, then they must also seek the inclusion of these terms in the prime contract. This inclusion throughout creates a flow down of potential for compensation from the owner to the subcontractor. Overall, the inclusion of the additional language ensures that the “Contractor,” whether a subcontractor or general contractor, can be compensated for damages arising out of force majeure events, within reason. Thus, the argument that increases in material prices might not fall within the force majeure protection, fails.
In conclusion, parties that are vulnerable to price increases should work to protect themselves by including protective terms in their contracts. While no party is at fault for these increases, the contractor that purchases materials for a jobsite often bears the burden. Although some parties involved in this type of construction contract may push back on the inclusion of such terms, it is essential to begin negotiations throughout the industry, to create fair and agreeable terms for all parties involved.
Footnotes
1 Sherman Botts, Material Cost Escalation: Who Bears the Cost Now? And, What Can Be Done to Address the Problem in the Future?, Stinson LLP (Oct. 11, 2021), https://www.stinson.com/newsroom-publications-material-cost-escalation-2021.
2 Id.
3 Subcontractors, INTERNAL REVENUE SERVICE, https://www.irs.gov/pub/irs-regs/subcontractorstext.prn.pdf.
4 Force Majeure, Cornell Law School: Legal Information Institute https://www.law.cornell.edu/wex/force_majeure.
5 Id.
6 DOES YOUR CONTRACT PROTECT YOU AGAINST MATERIAL PRICE INCREASES?, McConnell Wagner Skyes and Stacey, PLLC, https://www.mwsslawyers.com/articles/does-your-contract-protect-you-against-material-price-increases/.
7 AIA Document A201—2017: General Conditions of the Contract for Construction, American Institute of Architects, https://content.aia.org/sites/default/files/2017-04/A201_2017%20sample%20%28002%29.pdf.
8 E.g., added verbiage will be annotated as such.
9 E.g., removed verbiage will be annotated as such.
Lea Nobles
Morgan “Lea” Nobles is a 2L at Florida State University College of Law, where she is pursuing the Business Law Certificate. Nobles serves as a staff editor for the Florida State University Law Review, contributing brief writer for the Moot Court Team, and articles and notes editor for the FSU Business Review. She also currently works for Miller Electric Company as a legal intern, and for the Stoops Center for Law and Business as a teaching assistant. Nobles is interested in business, corporate, and construction law. Nobles is from the small town of Farmville, North Carolina. She attended undergrad at East Carolina University’s Honors College, where she graduated summa cum laude with a Bachelor's of Science in Political Science. In her free time, she enjoys spending time with her family and dog or playing flag football with her friends.