Lots to Think About: Contracting in Response to How Global Events Affect Construction (March 2022)

Global events have presented an ever shifting set of obstacles for the construction industry. Early on in the COVID-19 pandemic, actual and expected shutdowns created severe uncertainties in the industry. Later, governmental requirements on both public and private projects posed challenges. Beyond the direct impacts of illness from COVID-19, lagging disruptions in the availability of materials and equipment have severely impacted the industry. A string of other adverse events have also contributed to increased prices or reduced availability of materials, including the global micro-chip shortage, import/export tariffs, Texas power grid disruptions, and now the war in Ukraine. Lumber prices may have peaked and are now subsiding, but the war in Ukraine and other events have caused spikes in other commodities, including oil and gas prices. These industry disruptions have plagued progress and pose substantial risks of delays and cost overruns. In response, construction companies need to ensure that they contract to anticipate certain risks.

Material Price Increases

The timing of bidding, ordering, contracting, and delivery of materials are all critical considerations in the evaluation of material price increases on a construction project. Without express contract language excusing performance or permitting a cost increased, Wisconsin law generally does not entitle a party to additional cost or time due to material price increases, even when prices change.

A variety of price escalation clauses can be utilized to transfer risk between parties, which generally include the following forms:

  • Any Increase/Day-One. A clause allowing for any increase allows a contractor to increase its price during the project or after a set date. Because these clauses are open ended, they expose the upstream party to all risks of price increases for all materials, or specific materials if designated. As a result, these clauses function similar to allowances, although potentially not permitting the upstream party the benefit of price decreases.
  • Threshold. A threshold clause sets a specified threshold over which the contractor is entitled to a price increase. With this structure, the contractor will share the risk up to the threshold and the owner (or other upstream party) will bear the risks in excess of that threshold. Parties can also negotiate a cap to the owner’s high-end risk at a higher threshold.
  • Delay price escalation clauses set the triggering milestone at a date within which the contractor has locked prices. The clause allows the contractor to increase its price if the project or portion thereof is delayed beyond a milestone date.

Price escalation clauses are often negotiated to be a combination the three types. For example, a contractor may be entitled to a price increase beyond a certain threshold, provided the project is subject to delay beyond a set milestone date when prices may be readjusted. In addition, the amount of increase to the contract price may be adjusted for the actual costs incurred or to mirror the pro-rata changes in industry material price indexes such as the producer price index.

Delays

Early on in the pandemic, as construction project delays, cancelations, and shut-downs, resulting from COVID-19 first were becoming known, parties turned to the general language of force majeure or “act of God” contract clauses, often invoking “governmental orders” or the catch-all “unavoidable casualties or other causes beyond the Contractor’s control” as the basis for excuse from performance  As the pandemic has continued, the global effects have become more publicized and understood, and governmental shutdowns have largely ceased. In turn, parties have become increasingly limited in their willingness to excuse delays or pay increased costs due from COVID-19.  The result is increased potential for claims and conflict.

Construction companies should proceed cautiously because generic force majeure clause on their own, may not excuse performance related to pandemic or supply chain disruptions, particularly as they may be known at the time of contracting. Generally, for force majeure to apply the non-performance must be “caused by circumstances beyond the reasonable control of the [invoking party] or by an event which is unforeseeable at the time the parties entered into the contract.” Goldstein v. Lindner, 2002 WI App 122, ¶31, 254 Wis. 2d 673, 687, 648 N.W. 2d 892.

Considering information currently available about the means of symptoms, transmission, testing, treatments, and vaccinations, in addition to the material unavailability and price increase issues discussed above, it may be increasingly challenging to demonstrate that delays due to an infected work force are unforeseeable or constitute force majeure.

As a result, a party seeking to excuse performance may need to show specifically how the circumstances of the delay were unforeseeable.

Conclusion

As the last few years have demonstrated, numerous potential and novel obstacles could affect the success of a construction project. Contractors should work with their counsel to craft contract clauses tailored to each specific project and designed to anticipate risks that may arise during the course of construction.

By: Attorneys Brian R. Zimmerman and Bryan T. Kroes

 

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