Price Escalation Clauses in Construction Contracts: Mitigating Risks for Owners, Contractors, and Subcontractors

Description

Construction industry costs have increased significantly since early 2020, particularly for steel and lumber. Builders and owners are more frequently facing busted budgets and complex negotiations, sometimes resulting in litigation over which party is responsible for absorbing the increased costs.

The answer to resolving disputes likely lies in the provisions of the construction contract, whether it is a cost-plus or fixed-price agreement. The initial decisions on structuring a construction project may determine which party--owner or contractor--bears the burden of future price increases.

Construction counsel should also consider when significant price increases trigger a force majeure clause. Traditionally, a force majeure clause excuses a contractor's performance for catastrophic or otherwise unanticipated events identified in the contract, such as extreme weather, wars, strikes, and changes in the law that would make performance impossible. Counsel should review specific provisions in the force majeure clause to determine the potential for equitable relief.

As an alternative to force majeure, construction counsel and stakeholders may consider reducing risk with change orders based on the commercial impracticality of the price increase. Some courts have found that unforeseen price increases can be significant enough to merit an adjustment or reformation of a contract. But other courts have been less sympathetic to this type of market-driven argument.

Some contracts include a material price escalation clause that allows the parties to adjust the price based on an agreed-upon metric. Establishing these types of savings clauses if material prices decrease beyond a certain threshold can be a useful incentive to facilitate the inclusion of an escalation clause in construction contracts.

Listen as our expert panel provides guidance on this issue and the best practices for navigating construction material price increases to mitigate risks and costs for all stakeholders.