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BROWNSTEIN CLIENT ALERT AUGUST 3, 2021
Recent volatility in construction material prices has posed significant challenges to the smooth execution of well-planned and managed projects. This phenomenon, attributed to factors such as COVID-19-induced shutdowns, lingering tariffs and quotas, increased demand from single-family homebuilders, and instances of market manipulation, underscores the profound risk these fluctuations pose to construction projects. Beyond escalating costs and potential delays due to material shortages or rationing, these price swings are reshaping how projects are approached and executed. explores strategies for managing such impacts through contractual provisions and proactive measures.
Contracts and Risk Allocation
Managing volatility is not a novel concept in business environments crossing borders. Provisions addressing currency fluctuations serve as a valuable precedent when drafting contracts to mitigate material cost risks. Below, we outline approaches parties might consider:
Contractor-at-Risk: Allocates responsibility for price changes to the contractor.
Price Ceiling: Sets an upper limit on prices within contractual terms.
Force Majeure Clauses: Mitigates responsibility in case of unforeseen circumstances.
Adjustable Pricing: Incorporating indices or benchmarks that adjust according to market fluctuations.
Proactive Measures
For projects without specific provisions addressing volatility:
Timely Communication: Prompt sharing of price impacts and product avlability between suppliers, general contractors, and owners is crucial.
Diversification Strategies: Identifying alternative suppliers locally or regionally can provide a buffer agnst price hikes.
Direct Purchasing: Negotiating direct purchases from manufacturers may reduce profit margins on intermediaries.
Pre-Ordering Materials: Securing materials early to avoid future price increases and shortages.
Storage Solutions: Allocating space for storage of excess materials until required, reducing lead times.
In an environment marked by unpredictable commodity pricing, some developers might choose to defer their construction plans. Those proceeding face the risks associated with increasing costs, delays, or disputes. However, incorporating equitable risk allocation through contract terms and actively managing project dynamics can mitigate these challenges. For ongoing projects, proactive communication and strategic planning are essential for navigating volatility.
: This document is inted to provide general information about recent fluctuations in construction material prices without offering specific legal advice. Should you require assistance with this or any other issues, please consult the attorneys listed within our firm or your regular Brownstein Hyatt Farber Schreck team member.
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