Material Price Escalation Puts Contractors At Risk, But The Law Offers Little Reprieve (Part I)

According to AGC’s Chief Economist, Ken Simonson, construction material prices for the 12-month period from October 1, 2010 – September 30, 2011 increased 8.1%, while the prices charged by general contractors for non-residential construction increased between 2% – 3%.  In the AGC’s October 18, 2011 press release, Mr. Simonson was quoted as saying the following: “Feeble demand for construction is forcing contractors to absorb the bulk of materials price hikes, instead of passing them along to owners.  This pattern has persisted for more than two years, and many contractors are increasingly at risk of going under.”

The AGC’s press release reminded me of 2003-2006, when the price of steel in particular was going through the roof, driven to a large extent by international demand (I’m looking at you, China!).  While material cost escalation today may not be quite as dramatic as what the industry went through in the middle of the last decade, it does beg the question: what can the law do to help alleviate the pinch?

Short answer: not much.  Contractors resorting to common law contractual defenses (such as impossibility, impracticability and frustration of purpose) and contract provisions (such as force majeure clauses) have found little success shifting the risk of cost increases on fixed price contracts to project owners.  Part II of this series will discuss the limitations of existing law in obtaining judicial relief for material price increases.  Part III will discuss how to manage your risk in light of these limitations.

Stay tuned in the days ahead for more.

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Filed under Feature story, Material Cost Escalation

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