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OP-ED: How owners, contractors can deal with price increases, supply interruptions

Mike Salsgiver

Mike Salsgiver

BridgeTower Media Newswires

The construction industry is now experiencing an unprecedented mix of steeply rising materials prices, snarled supply chains and staffing difficulties.

Meanwhile, slumping demand is keeping many contractors from passing on their added costs. This combination threatens to push some firms out of business and add to the industry’s nearly double-digit unemployment rate.

All this is happening just as the industry is emerging from the worst effects of the COVID-19 shutdowns and project interruptions around the United States. Although the construction industry in many states was able to remain open and continue working through 2020, owners, contractors and suppliers are not immune to the economic troubles that are now starting to show.

This situation poses immediate a threat owing to fast and steeply rising prices for materials, both for projects that have already been bid out or started and for preparing-price or guaranteed-maximum-price bids.

Since April 2020 the prices of all materials and services used in nonresidential construction have collectively soared nearly 13%. Meanwhile, bid prices have remained virtually stable, rising only 0.5% from April 2020 to February 2021. Some materials have risen even more steeply in price.

For instance, the national average retail price of on-highway diesel fuel climbed from $2.80 a gallon on February 8 to $3.19 on March 22 – a rise of 14% in just six weeks, according to a weekly truck-stop survey posted by the Energy Information Administration. Private price-tracking services have reported similarly steep increases for a variety of steel, lumber and engineered-wood products.

Since materials often make up half or more of the cost of a contract or more, such an increase could easily wipe out the profit from a project and lead to severe financial hardship for the contractor.

Additionally, delayed deliveries, higher expenditures for personal protective equipment and other sanitation measures, and shortages of employees or subcontractors’ workers on jobsites because of the coronavirus are all driving up contractors’ costs. In some cases, project completions are being delayed, meaning contractors receive needed payments later and may incur penalties for missed deadlines.

AGC is providing briefings directly to groups of federal procurement officials and Biden administration officials, and is working with coalitions to eliminate harmful tariffs on construction materials and to expedite freight movements. However, many of the biggest difficulties result from the sorts of extreme economic disruptions that are being caused by the pandemic and subsequent labor shortages, aggravated in some cases by plant breakdowns from storms or other events. These supply and demand imbalances will take time to work out.

Until the economy responds to the shocks that have occurred this past year, what can be done?

The situation calls for immediate action by federal trade officials to end tariffs and quotas that are adding to price increases and supply shortages. Officials at all levels of government need to identify and remove or lessen any unnecessary or excessive impediments to the importation, domestic production, transport and the delivery of construction materials and products. Project owners need to recognize how much conditions have changed for projects begun or awarded in the early days of the pandemic and consider providing greater accommodations and cost-sharing. Contractors should become even more vigilant about changes in materials costs and expected delivery dates and should communicate the information promptly to current and prospective clients.

Owners and bidders may want to consider price-adjustment clauses that would protect both parties from unexpected swings in materials prices. Such contract terms can enable the contractor to build in a smaller contingency to its bid and providing the owner an opportunity to share in any savings from downward price movements (which are likely at some point, particularly for long-duration projects). Public owners and agency personnel should review all regulations, policies and enforcement actions that may be unnecessarily driving up costs and slowing importation, domestic production, transport, and delivery of raw materials, components and finished goods.

Although contractors cannot unclog ports or rescind tariffs, they can provide project owners with timely and credible third-party information about changes in relevant material costs and supply-chain snarls that may affect the cost and completion time for a project that is under way or for which a bid has already been submitted. This communication must occur regularly, both before bid submission and throughout the construction process.

Owners can authorize appropriate adjustments to design, completion date and payments to accommodate or work around these impediments. Nobody welcomes a higher bill, but the alternative of having a contractor stuck with impossible costs or timing is likely to be worse for many owners. For projects that have not been awarded or started, owners should start with realistic expectations about current costs and the likelihood of increases. They should provide potential bidders with accurate and complete design information to enable bidders to prepare bids that minimize the likelihood of unpleasant surprises for either party.

The parties may also want to discuss the best timing for ordering materials and components. Buying items earlier than usual can provide protection against cost increases, but it comes with the need to pay sooner and to potentially pay for storage, security against theft and damage, and the possibility of design changes.

Materials prices eventually will reverse course. Owners and contractors alike will benefit when that happens. Until then, cooperation and communication can help reduce the damage.

– Mike Salsgiver is the executive director of Associated General Contractors’ Oregon-Columbia chapter

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