Price Escalation Continues to be the Top Issue in Construction Contracts but Some Success Stories Can Now be Shared

The following is shared from an October 10, 2022 article posted on www.agc.org.

Price escalation and supply chain disruptions continue to register as the number one issue in construction contracts today. The absence of a price escalation clause is considered a “killer clause” for many general contractors working on private vertical construction. Public owners are taking notice as well.

Now there are some success stories of public owners addressing price escalation in their contracts and through contract administration. The St. Louis Water District (“District”) looked at the ConsensusDocs 200.1 Price Escalation Clause after dialoguing with the AGC of Missouri and AGC National. Consequently, the District included price escalation language in a recent bid for a $160 million project. It will also consider including such language in its future work, which is expected to amount to over $500 million of construction. Price escalation language helps mitigate the tremendous risk that General Contractors face today.

Interestingly, the District’s price escalation clause requires general contractors to decide if they want to take on the risk of de-escalation along with the benefit of potential increases for price escalation. Some general contractors may out opt-out of such a price escalation clause. These general contractors see the downside risk as too great because they face resistance from suppliers unwilling to give back money if an index indicates de-escalation. There are also concerns that objective indexes for materials costs might not accurately reflect prices actually experienced on a particular project.

Texas Department of Transportation (TxDOT), in an April 2022 internal memo, recognized there have been availability issues and increased lead times for items as well as “significant increases (over 100 percent in some cases) in some material prices.” The memo lays out eight ways TxDOT strives to be a good owner in these challenging times. Some highlighted strategies include:

1. Pay as soon as possible for materials.
2. Allow expanded use of purchasing and storing materials beyond just long lead items under its “delayed start authority.”
3. Pay higher prices when the timing for purchasing materials is delayed by the owner.
4. Pay the higher price when the quantity of material needed is increased.
5. Allow for substitutions.
6. Consider deletions to avoid long lead times or more expensive materials.
7. Consider giving additional time.
8. Refer matters to the TxDOT Administrator (if all else fails).

These examples of price escalation “success stories,” as well as the latest price escalation and supply chain disruption trends, were discussed at the Associated General Contractors of America (AGC) recent National Chapter Leadership Conference in Washington, D.C. by ConsensusDocs Coalitions Executive Director Brian Perlberg, along with AGC’s Chief Economist Ken Simonson.