The construction industry in 2023 continues to face supply chain disruptions and escalating material costs. The 2023 Construction Outlook National Survey by the AGC reveals that 36% of contractors canceled projects in 2022 without rescheduling due to rising costs.
Contractors identified an economic slowdown and building material prices as their top concerns for 2023. Construction companies make informed decisions during the bid and contract phases to counter these challenges to minimize supply chain issues. However, as revealed by Document Crunch’s AI analysis, not all contractors take adequate precautions, with only 34% of construction contract agreements addressing price escalations in 2023.
Managing Material Costs from the Start
Early Negotiation and Bidding Process:
To effectively manage rising material costs, contractors should begin negotiations during the invitation to bid phase. Educating pre-construction teams on purchasing and contract terms is crucial for a successful project.
Setting Time Limits for Bid Proposals
Contractors can include language in their bid proposals that establishes a time limit for acceptance, allowing them to update pricing and recommendations as needed. However, contractors should know any bid instructions that exclude price increases or require extended bid validity.
Crafting Material Escalation Clauses in Construction Contracts
Material Escalation Clauses
During contract negotiations, it’s essential to include a material escalation clause. The burden of risk depends on the project’s pricing structure:
- Fixed price Contracts: Responsibility for extra expenses falls on the contractor.
- Cost plus contracts: While the owner shoulders the burden of additional costs, contractors are expected to regulate prices effectively.
- Cost reimbursement contracts: With a guaranteed maximum price (GMP): The financial liability is shared between contractors and owners, with owners responsible for extra costs only up to the specified GMP.
Early Material Purchasing
Ideally, contractors should lock in material pricing as early as possible. This may involve buying out volatile materials in advance and storing them, which increases storage costs. However, the pandemic has led to a greater willingness among owners to share price escalation risks.
Addressing Material Costs Through Contract Clauses
General Provisions vs. Specific Provisions
General provisions, such as “Delays and Extensions of Time” and “Labor and Materials,” offer some relief for contractors. Still, they are not specific to supply chain disruptions or material price escalations. However, specific provisions, such as “material price escalation” or “supply chain disruptions due to a pandemic,” are more likely to relieve rising material costs.
Utilizing AI Contract Review Software
AI can help contractors quickly assess contract terms and spot material price escalation provisions. This ensures proper language and handling of cost escalations between parties. With AI assistance, contractors can confidently lead negotiations, save on overhead and material costs, and protect their fees.
The construction industry must adapt to the ongoing supply chain crisis and material price escalation. In addition, contractors can mitigate risk and secure projects in this challenging landscape by implementing effective negotiation strategies, crafting material escalation clauses, and leveraging AI contract review software.