Navigating Material Price Volatility in Construction: Risk Mitigation Strategies

BROWNSTEIN CLIENT ADVISORY, AUGUST 3, 2021

The recent volatility in construction material prices poses a significant threat to the well-planned and efficiently executed projects. Experts have identified various factors driving these fluctuations including COVID-19-induced shutdowns and restrictions, lingering tariffs and quotas, heightened construction activity among single-family homeowners, as well as instances of speculative stockpiling and profit-seeking activities. Regardless of their root cause, material price volatility poses a substantial risk to construction eavors. Beyond escalating project costs, the fluctuation also angers completion timelines due to material scarcity or unavlability. explores two fundamental strategies for mitigating the impact of these fluctuations: 1 managing risks through contractual provisions and 2 taking proactive measures to prevent or alleviate impacts on the project.

CONTRACTUAL APPROACHES

Though extreme price volatility in construction materials is a relatively new phenomenon, contracts have historically been devised to address similar economic uncertnties. Parties may incorporate clauses that assign responsibility for price variations resulting from unforeseen market conditions or supply chn disruptions. For instance, force majeure provisions allow parties to escape contractual obligations due to extraordinary circumstances beyond their control, such as natural disasters or pandemics. Hardship clauses enable renegotiation of contract terms in response to economic downturns leading to disproportionate financial burdens on one party.

For existing contracts lacking specific language addressing material price fluctuations, parties may still explore legal defenses like frustration of purpose and impossibility of performance in jurisdictions recognizing these doctrines. These common law principles can provide relief when an unforeseen event rers contractual performance impracticable or impossible due to a change in circumstances that was not anticipated by the contracting parties.

PROACTIVE INTERVENTIONS

Regardless of whether contracts contn provisions for dealing with volatility, proactive strategies are crucial for managing its impact on construction projects. Prompt communication between suppliers and contractors is paramount - timely information exchange can prevent misunderstandings and enable swift decision-making. Below are some practical measures project stakeholders might consider:

1. Offering Incentives: Suppliers may be encouraged to ensure performance through substantial upfront payments, cancellation fees, or commitments to future work.

2. Identifying Alternative Suppliers: Expanding the supplier base includes exploring options in neighboring regions for better avlability and pricing.

3. Direct Purchasing: Owners can bypass contractors by purchasing directly from manufacturers, potentially reducing added costs.

4. Early Material Procurement: Securing all necessary materials at the outset reduces the risk of price increases later in construction phases.

5. Storage Solutions: Reserving space in warehouses or staging areas can mitigate supply chn disruptions by ensuring materials are readily avlable for installation.

While some developers might consider postponing planned projects due to the uncertnty surrounding material prices, those proceeding with existing ventures do so with potential risks of increased costs, delayed schedules, and disputes with suppliers. However, these risks can be mitigated through contract terms that equitably allocate responsibility as per each party's agreement or by adopting proactive strategies med at reducing impact.

THIS DOCUMENT IS INTED TO PROVIDE GENERAL INFORMATION ABOUT THE EFFECT OF RECENT MATERIAL PRICE VOLATILITY ON CONSTRUCTION PROJECTS. IT DOES NOT PROVIDE SPECIFIC LEGAL ADVICE OR REPRESENTATION. Contact our firm if you need legal advice on this matter. This communication may be considered promotional in certn jurisdictions.

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