“Time is money.” Sure, it’s an overused cliché. But as construction industry participants know better than just about anyone else, there’s a whole lot of truth in those three simple words. When projects run late, completion costs invariably rise, frequently resulting in the assertion of delay claims (and counterclaims. And third-party claims. And cross-claims … you get the picture). “No damages for delay” clauses in construction contracts seek to manage loss exposure arising from delay by limiting a contractor’s remedy for delay to a time extension only. A typical “no damages for delay” clause might read as follows:
The Owner shall not be liable to the Contractor and/or any Subcontractor for claims or damages of any nature caused by or arising out of delays. The sole remedy against the Owner for delays shall be the allowance of additional time for completion of the Work, the amount of which shall be subject to the claims procedure set forth in the General Conditions.~ Werner Sabo, Legal Guide to AIA Documents, 2008 (5th ed.)
Such clauses aren’t always enforceable. In fact, under North Carolina statutory law, “no damages for delay” provisions are unenforceable in prime contracts between public owners and general contractors. See N.C. Gen. Stat. § 143-134.3. But in all other cases where such clauses are enforceable, do they provide an impenetrable defense against increased costs arising from project delay? Not necessarily. Continue reading
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.