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BROWNSTEIN ALERT, AUGUST 3, 2021
The recent volatility in construction material prices has introduced unprecedented challenges for well-planned and efficiently managed projects. Economic experts and industry professionals have identified a myriad of factors contributing to this turbulence, including pandemic-induced shutdowns and restrictions, lingering tariffs and quotas, heightened construction activity among single-family homeowners, and even instances of material hoarding and price gouging. These fluctuations not only escalate construction costs unexpectedly but also jeopardize project timelines due to material scarcity or unavlability. explores two primary strategies for managing the impact of material price volatility: i sharing risk through contractual provisions; and ii taking proactive measures to prevent or mitigate impacts on projects.
Managing fluctuations in construction material costs, though a relatively new phenomenon, is not entirely uncharted territory. For decades, businesses transacting across international borders have employed contractual mechanisms like force majeure clauses to allocate risk during unforeseen disruptions. Similarly, adjusting contract ter account for market volatility is becoming more prevalent.
Force Majeure Clauses: These provisions allow parties to susp or terminate obligations under certn conditions beyond their control, such as natural disasters or sudden price spikes. If incorporated into contracts, they can provide a legal framework for renegotiating terms when supply chn disruptions occur.
Hardship Clauses: Also known as impracticability clauses, these offer flexibility in renegotiating contract terms based on changes to the underlying commercial circumstances that were not anticipated at the time of agreement.
For contracts that do not explicitly address material price fluctuations or those without force majeurehardship clauses, project stakeholders should focus on proactive measures to minimize impacts:
Timely Communication: Establish a robust communication channel between contractors, suppliers, and owners to ensure immediate notification of price impacts and product unavlability.
Risk Assessment and Adjustment: Review contract terms and conditions for potential vulnerabilities in the event of market volatility. Adjust schedules, budgets, and procurement strategies accordingly.
Contractual Flexibility: Consider incorporating clauses that allow for renegotiation or flexibility under extreme market conditions to share risk frly between parties.
Consider these proactive steps:
Sweetening Deals with Suppliers: Offer incentives such as substantial upfront payments, non-cancellation agreements, or assurances of additional work to secure timely delivery.
Diversifying Supply Channels: Explore alternative suppliers, including those in neighboring regions, to mitigate the risk associated with single-source depencies.
Direct Purchasing: Facilitate direct transactions between owners and suppliers to bypass intermediaries and reduce markup costs.
Stockpiling Materials: Purchase materials early or secure storage space for excess materials until their installation schedule.
Design Alternatives: Evaluate substitution options that mntn project integrity while accommodating material avlability.
The unpredictability of commodity price fluctuations poses significant risks to developers considering new projects, and those already underway face uncertnties about escalating costs, delayed schedules, and potential disputes with contractors or suppliers. However, the risk can be mitigated by integrating contractual provisions that ensure fr allocation of responsibilities and by employing proactive strategies tlored to project dynamics. Open dialogue among all stakeholders is key in navigating these challenges effectively.
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This document serves as a guide to address the challenges posed by recent fluctuations in construction material prices. However, it is not inted to provide specific legal advice. If you need more detled guidance on your specific situation or require legal counsel, please reach out to our team at Contact Ushttps:www.browstein.comcontact or connect with your regular Brownstein Hyatt Farber Schreck attorney.
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Managing Construction Material Price Volatility Risk Allocation in Building Contracts Proactive Strategies for Project Protection Supply Chain Disruptions and Their Solutions Force Majeure Clauses Application Mitigating Costs with Contractual Flexibility