What Is Causing Material Delays and Price Increases?
During the height of the COVID-19 pandemic, many of us felt the volatile effects of the supply chain disruption. As the virus spread, some manufacturers were forced to close temporarily, prices went up, and travel restrictions made distribution challenging. When 2021 arrived, we may have believed that the worse was behind us. However, additional factors are now coming into play. Among them are a lack of truck drivers and a rising price for diesel fuel.
Higher Construction Costs
From January 2020 to January 2021, we saw a variety of construction materials increase in price. For example, fabricated structural metal products went up by 3.2%, while steel mill products increased by 7.4%. In that same time period, iron and steel prices jumped by 15.6%, while softwood lumber prices escalated by 75%. Costs also swelled for insulation materials, copper and brass, gypsum products, asphalt, concrete production, and many other materials.
Costs have risen so sharply this year that the Associated General Contractors of America issued a Construction Inflation Alert, noting a 12.8% acceleration in construction project prices since the beginning of the pandemic. Unfortunately, that trend does not show any signs of slowing down.
The Driver Shortage
As you may know, more than 70% of all freight in the United States is transported and delivered by the trucking industry. That is a remarkable percentage, one that relies on the daily efforts of some 3.5 million truck drivers. However, the trucking industry is facing a driver shortage, estimated to be about 60,800 this year but expected to balloon to 160,000 by 2028.
This trucker deficit has been creeping up for the past several years. The industry is seeing that experienced drivers are getting older and beginning to retire, while fewer younger people are choosing that career. The issue has been exacerbated as online shopping has increased and consumer demand for goods is growing. To make matters worse, during the pandemic, many DMV offices and driving schools closed for a time, which brought about delays in training new drivers.
The driver shortfall is playing a role in increasing freight costs, which lead to higher prices for all types of goods and materials. To keep up with demand, according to the American Trucking Associations, the industry will need to hire some 1.1 million new truck drivers over the next ten years.
Rising Diesel Prices
Another challenge that the trucking industry must face is the rising cost of diesel fuel. The per-gallon price was $3.07 in March 2021, which is 22 cents higher than it was in spring 2020. And experts expect that the cost will keep going up in the months ahead. This is bad news for trucking companies as fuel is their greatest expense, accounting for 39% of all operating costs.
Why are fuel costs rising? Experts are not in agreement, but some blame lower oil production around the world. Saudi Arabia, for example, has reported a 20% lower production. And even the United States has produced less oil in recent months, due in part to extreme winter weather that damaged equipment and limited output in Texas and other areas.
Increased Material Prices
When you sign a contract, you base your price not only on labor but also on the cost of the materials you will be using. So, when those materials go up in price, your profit margin is in jeopardy. Given the driver shortage and the increased fuel costs, you can expect that your materials will become more costly in the coming months. So how can you combat that?
One solution is to include a price acceleration clause in your contract. This clause stipulates that if the cost of materials increases after the original agreement is signed, you are allowed to raise your price. With a standard price acceleration clause, you can increase your price if your material costs go up, by 5% for example, but that will not require a change order. However, the language likely will require you to provide the owner with documentation of the material price increase.
If you are a subcontractor, you can benefit from a price acceleration clause because it will permit you to increase your price to the prime contractor as needed. In turn, it would be wise for the prime contractor to include such a clause so it can raise its price to the owner as well.
Keep in mind that some owners will not agree to a price acceleration clause. In that case, you will have to state fixed prices in your contract. To make that work, you may want to consider buying and storing materials that you often need. This process would guarantee that you have an inventory purchased at a set price, and you will not be surprised by cost increases.
Material Availability and Delays
Given all the issues with the supply chain, you may suddenly find that certain materials you need are not available. To protect yourself from that scenario, you might want to add a material substitution clause to your contract. This provision will allow you to make a reasonable substitution if the specified material is unavailable due to matters beyond your control. It should also state that any price increase will be passed along to the customer.
You should also review your contract for stipulations regarding delays. Many kinds of delays, such as those caused by severe weather, are considered excusable and warrant time extensions for you to complete work. However, material delays may not be regarded as excusable, so you would need to accelerate your schedule. And paying your workers for those increased hours can be costly. If possible, include provisions in your contract that permit extensions for material delays.
As you prepare for the coming months, there are a few steps you can take to protect yourself from increased prices and delays. Make sure to review your contracts and include the provisions discussed earlier. In addition, build good relationships with your vendors. A trusted partnership with your suppliers will put you in a better position to get the materials you need. In addition, keep an open line of communication with your customers. Let them know when you anticipate delays and update them with your solutions. By managing their expectations, you have a better chance of successfully completing your projects and keeping your company viable for many years to come.
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.