The Escalating Cost of Construction and Combating Price Increases
How can roofing contractors protect themselves from labor and material price increases on a project? A roofing contractor should first consider the payment method on a project. The ideal way to combat a cost increase is to perform the project on a cost plus basis. In other words, the roofing contractor’s payment is based on the actual cost plus a certain amount for profit and overhead. Although this payment method may be preferable, it is often difficult to obtain cost plus contracts given the desire for owners and prime contractors to have a fixed price.
Accordingly, the roofing contractor should consider adding additional terms to its contract to protect it from labor and material price increases. The roofing 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% 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% subsequent to the making of this Agreement, Contractor, at its sole discretion, may terminate the contract for convenience.
There are three components to the price acceleration clause. First, the price acceleration clause provides that the roofing 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 roofing contractor is providing the prime contractor or owner with evidence of the increase in 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%. Although disfavored, a termination for convenience clause may allow the roofing 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.
A roofing subcontractor may find it difficult to include the price acceleration clause in its 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 roofing 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 roofing contractor adds a price acceleration provision to their contract, the roofing 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. Roofing contractors should also use common sense with regard to providing firm bids for contracts for projects that may not begin construction for more than three months from the time the proposal is submitted. Under those circumstances, the roofing contractor faces additional exposure to the increase in the cost of labor and materials. Therefore, estimating those jobs appropriately can make or break a roofing contractor.
If you would like to more information on contracts within the construction industry, please contact us today.
Disclaimer: 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.