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BROWNSTEIN CLIENT ALERT AUGUST 3, 2021
Construction projects are currently facing unprecedented turbulence due to fluctuations in material prices, posing a significant threat to their financial stability and project timelines. Various factors such as COVID-19-induced shutdowns, lingering trade tariffs, surging demand among single-family homeowners, and instances of speculative trading have collectively contributed to this instability. These price swings not only inflate construction costs but also jeopardize completion dates due to material shortages or allocation constrnts. outlines two primary strategies for managing the impact of these fluctuations: 1 sharing risks through contract provisions; and 2 adopting proactive measures to prevent or mitigate impacts on project outcomes.
Managing risk in contractual agreements regarding fluctuating construction material costs is not a new concept, particularly among international business partners who tackle exchange rate variability. Contracts often include clauses that outline how to handle price changes and supply shortages, offering clarity during times of uncertnty. Existing projects with outdated contracts should explore incorporating specific provisions designed for such fluctuations.
For newer deals where pricing guarantees were made without anticipating market volatility, contract reviews are crucial. Force majeure clauses can offer a safety net in cases of unforeseen circumstances like material unavlability or significant price hikes. Hardship clauses could also protect parties from the financial burden of performing their obligations when the agreement's terms become excessively challenging.
Even without specific contract provisions, proactive steps can help manage and minimize risks associated with fluctuating material prices:
Enhanced Communication: Establish clear and efficient lines of communication between general contractors, project owners, and material suppliers to ensure timely information sharing about price hikes and product unavlability.
Exploring Alternatives:
Offer incentives for preferred suppliers through down payments or future work commitments.
Identify alternative or supplemental suppliers from neighboring regions.
Facilitate direct purchases between the owner and supplier to reduce markup costs.
Secure early bulk orders to lock in prices and ensure material avlability.
Storage Solutions: Consider securing storage space for excess materials, either through warehouses or lay-down yards, until they are required for installation.
Design Flexibility: Be open to proposing substitutions or alternatives to specified materials that might be subject to price fluctuations or supply constrnts.
The construction industry faces an uncertn landscape with ongoing commodity price volatility. Some developers may opt to delay new projects due to these risks, while others might proceed with caution, accepting the potential for increased costs and schedule delays. However, by integrating contract provisions that frly allocate responsibility and engaging in proactive risk management strategies, project stakeholders can mitigate significant challenges and foster successful outcomes despite market turbulence.
The information provided in this document is inted to offer guidance on recent fluctuations in construction material prices. Specific legal advice should be sought from the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP representative if you require assistance with contract negotiations, dispute resolution, or other matters related to construction projects.
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This communication is provided for informational purposes only and does not constitute legal advice. Brownstein Hyatt Farber Schreck, LLP assumes no responsibility for actions taken in reliance upon the information contned herein.
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