Rising Costs – Are You Ready? Fine-tuning of the contract for 2022 | Snell and Wilmer

Looking ahead to 2022 in the construction landscape looms the specter of cost escalation claims. Over the past year, price escalation has become extreme and clauses governing cost escalation have come under greater scrutiny as the construction industry grapples with a series of challenges. impacts related to the challenges of cost predictability and stability. The emergence of Covid 19 in early 2020 is still relevant. This has led to global shutdowns, disruptions to supply chains, material shortages, labor shortages, changing security requirements and an inflation rate not seen in over 40 years.

Construction industry stakeholders, including owner, design and construction management, may want to spend time reading and reviewing their standard contracts to analyze language dealing with cost impacts and price escalation. The challenges will be with us throughout 2022. It is vitally important that your contracts take into account cost escalation considerations; and, if your existing contracts do not take these considerations into account, you may want to address this issue immediately by revising existing contracts.

The three most common types of cost escalation clauses are (1) escalation on escalation, (2) threshold escalation, and (3) time escalation. A claim for indexation for any increase entitles the contractor or supplier to reimbursement for price increases that occur after the performance of the contract. This type of clause typically attaches to specific types of materials and equipment that will likely have a part number and allocation associated with the specific material.

A threshold escalation clause allows an increase in the cost of materials up to a certain amount or threshold, regardless of the parties’ agreement, which is usually a certain percentage. In the case of public works, a threshold escalation clause can be standard, set by the federal, state or local government. In private works, this is what the parties generally negotiate.

The delay escalation clause allows the contractor or service provider to claim and recover increased costs due to delay in the progress of the project beyond a predetermined work date or dates.

It is important to note that in the absence of an express price increase clause in your agreement or a contractual right to recover price increase costs based on law or government regulation, the contractor or the service provider harmed by the price increases will face an uphill and difficult battle trying to recoup the cost increase on a fixed price. Contract. Also, escalation clauses generally never allow a contractor to recover costs resulting from an under-bid for a job if the contractor chooses not to rely on relevant information for the preparation of the bid. Thus, a contractor or service provider may want to systematically back up and support their offer or price proposal.

Best practices may include a quote sheet that estimates the price of the job down to the labor and materials required. This submittal sheet can then be supplemented with actual material invoices or quotes received for the labor materials listed on the submittal sheet or quotes from subcontractors, including those identified in change orders. . You may want to get multiple quotes. The Contractor may wish to document proof of payment for material and labor purchased to demonstrate that it was paid at the prices invoiced or quoted. Transparency is usually your best bet, you may want to document carefully and thoroughly. Generally, the more transparent you are in providing documentation, the more compelling your request.

A contractor may want to be more proactive to avoid, or at least mitigate, any cost escalations in the current construction environment. Such proactive measures may include sending a notification as soon as the project manager becomes aware of a longer than usual lead time for materials, or a significant increase. The contractor’s project manager should also promptly request a replacement, if possible. Document the process and submit change order requests for price increases. Included in this documentation must be the price on which the offer was based to establish the cost delta. Comply with the requirements of your insurance claim.

You may want to be proactive and review your time extension, cost increase, and force majeure extension clauses now. There’s usually no benefit in waiting for a problem to arise to figure out what your options are. It is still too new in the current era of COVID-19 to expect many relevant legal cases to guide your analysis and decision-making, so there is a greater element of unpredictability as to who bears the risk. If the specifications include a clause providing for riders in the event of a “change in character” of the work, this type of generic language can constitute a good argument to justify an additional payment. Certainly, many supply chain issues have completely changed the nature and character of work in terms of acquiring materials and equipment.

There may be other possible avenues of recovery for extreme cost increases, including a cause of action for breach of the covenant of good faith and fair dealing implied in all contracts. This theory will not excuse a party from performing contractual obligations because the contract is no longer profitable; however, it may prevent parties from acting in bad faith in the face of these cost escalation issues.

Two other legal theories that may be helpful for potential avenues of recovery include commercial impossibility and frustration of purpose. With commercial impracticability, a contract is commercially impracticable because performance would cause extreme and unreasonable hardship, expense, injury, or loss to either party. It is usually a difficult burden to prove. It is not because the work may cost much more that the doctrine of commercial impracticability will apply. Similarly, there is the doctrine of nullification of the object of the contract. This legal theory allows the court to excuse a performance obligation under the contract if the contractor can no longer achieve its purpose for the transaction and the contractor did not cause the performance frustration. Basically, the frustration must be so bad that closing the deal makes little sense. In both cases, commercial impossibility or frustration of purpose, you may be able to recover the costs incurred in trying to perform the contract. However, these are generally difficult legal theories to prevail and there is no guarantee of recovery. Moreover, they generally apply only to cases of extreme or monumental cost increases.

Be proactive. You may want to review your contracts now and take the time to learn and understand both the content and application of any mechanisms for recovering potential cost increases in your agreements. Going forward, you may want to confirm that any new contract you are about to enter deals with increased costs. The threat of extreme cost escalation disruption may be with us for some time, so you may want to prepare now.

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