Using Your Contracts to Combat the Supply Chain Crisis
Whether you are buying groceries, ordering shingles, or trying to purchase a new home, you may have experienced sticker shock in recent months. As you likely know, since the COVID-19 pandemic began, many items have been hard to find and prices are increasing. You can’t read the news without learning more about how the lack of computer chips is impacting the electronics and automotive industries. The construction industry is feeling the squeeze, too, as shipments of roofing materials, lumber, insulation, steel beams, and other supplies are delayed. So how can you protect your company in these unprecedented times? Look to your contracts.
Key Clauses to Consider
Now more than ever, it is crutial that you read every word of your contracts and understand every provision. There are specific clauses that can help you anticipate and plan for price increases and materials shortages. Below are some that you may want to add to current and future contracts.
Force Majeure—This phrase means “superior strength” in French, and it refers to unexpected circumstances beyond your or your customer’s control. A force majeure clause distributes risk if a project is stopped or indefinitely delayed due to such unexpected circumstances, such as hurricanes, tornadoes, earthquakes, wildfires, and other “acts of God.” It also covers instances of war, terrorism, strikes, riots, and other emergencies caused by humans. Some contractors have successfully argued that the COVID-19 pandemic was a force majeure event and avoided liability.
Material Delay—Since force majeure events are considered excusable, you are not responsible for any delays resulting from those events. However, material delays are often not considered excusable. To combat that issue, consider adding a material delay clause to your contract. This inclusion will protect you from the risk usually associated with the late delivery of agreed-upon materials.
Material Substitution—If a specified material is found to be not just delayed but completely unavailable, a material substitution clause will allow you to make a reasonable substitution for that material. Work with your suppliers to review what materials will be available and determine what substitution is best suited for the project.
Price Acceleration—If prices go up after you have signed a contract, this provision will permit you to revise your price to reflect the adjusted material costs without having to file a change order. Note that you will probably need to provide your customer with evidence of the increased material price.
Termination—A termination for convenience provision may be included within a price acceleration clause. This provision will permit you to terminate a contract if material prices increase substantially or if you cannot secure the materials altogether.
Other Strategies for Success
Comprehensive and well-crafted contracts are critical for your company’s survival. But as you maneuver the materials crisis, there are other ways to manage today’s challenges.
Partner with Your Vendors—Check in with your suppliers often, explain your priorities, and get their advice about what materials are scarce and what you can easily get. Then if you can, stock up on the supplies you commonly use. By building an inventory, you may be able to prevent some project slowdowns. Also, when you treat your vendors as trusted partners, they may be more willing to help you get the items you desperately need.
Document Everything—Whether it’s an increased price, a change request, or an unanswered email, keep detailed records of all your orders and correspondence. Not only will this practice help you stay organized, but such documentation can also be invaluable if you find yourself having to file or defend a claim.
Communicate Clearly and Often—Be sure to keep your customers and vendors informed throughout every project. If there is an unexpected delay, send an update as soon as possible. And if there are other problems, try to offer solutions that will benefit everyone. By keeping in touch with your customers, you build their trust, which could make them more agreeable if conflicts arise.
The current materials crisis may feel unending, but there are ways to manage it. Take time to assess every project, review every contract, and create a game plan for any issues that arise. Work closely with your customers and your vendors, keeping everyone up-to-date.
Some industry authorities suggest that the supply chain will be unable to fully meet demand until late this year or even into 2022. Until things return to “normal,” use caution and discretion when bidding for future contracts. Material prices and availability may vary wildly between now and then the projects actually begin.
If you have questions about your contracts or provisions you would like to incorporate, be sure to consult legal counsel. The experienced attorneys at Cotney can review your agreements, discuss your individual situations, and help you determine what strategies to implement.
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.