With the costs of labor and materials running high, builders find themselves in disputes over who takes the hit on cost increases. Conflicts between general and subcontractors and owners are running high—even ending in litigation. Lawyers encourage avoiding late in the game conflict via attention to exclusion clauses during contracting.
Negotiations
Cost increases are leading to a rise in conflicts and legal battles. According to New Jersey construction attorney Rose Suriano: “The floodgates of litigation have opened because there are substantial losses…It’s particularly prevalent between general contractors and subcontractors.” Because no contractor really has time or money to waste on legal battles, lawyers, like Suriano, encourage putting more attention into negotiating escalation clauses when contracts are in development. As Construction Dive further reports:
A good cost escalation clause could help avoid…disputes….Typically, contract language would tie any increases in materials to an index for the product in question, or prevailing wages for labor. “You can start with as broad a clause as possible to protect the general contractor, and during negotiation, it could become as narrow as the owner insists so that you end up somewhere in the middle,” Suriano said. “It’s a question of negotiating an escalation clause that both parties can live with.” Typically, such a clause would assign percentages of those overages to one party or the other. For example, while an owner wouldn’t be asked to eat 100% of the cost increase, they might be induced to cover 80%, with a stipulation that they hire the contractor for their next project, as well. In turn, a GC could then negotiate down with its subcontractor so that overages are distributed between the parties as well.
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Good To Know
In Tenessee, construction lawyer Chris Dunn has observed that some project owners have been wiling to absorb cost increases and notes that owners have surprised him with their willingness to “pull together” with contractors, absorb costs and resolve issues even after the deal is inked. As Dunn explains:
“Decision makers for owners are buying bread and milk and fuel, and they can see diesel at $5 a gallon, so it’s undeniable there’s been a very sharp increase in prices everywhere….At least for those with healthy relationships, I think the owners and contractors have pulled together to figure out ways to move forward….Some of those ways could mean leaning on contingency clauses that are included in most contracts and cover a wide range of unforeseeable events. Allowances for specific materials or phases of a project that could experience cost overruns, which are nonetheless capped at a certain amount to protect the owner, have been used as well.”
Keep in mind that the more you understand about the finances of your business, the more agility you will have in moving forward despite rising costs. Though builders worry about passing on increases to customers, experts at Deloitte say doing so might be worth the risk: “Pass along higher costs to customers and they may just pass up doing business with your company…Yet the rewards of increasing prices often outweigh the risks…” For example, a company with a “35% gross profit margin that raises prices by 5% would need to suffer a 12.5% decline in sales before the price increase begins to erode profits.”
With Colonial Surety as your partner, you just might find that you are more prepared to move a new project forward then you realize. The Partnership Account® allows you to use our powers of attorney to issue your own bid bond—and you can do so right up to the deadline, incorporating last minute labor costs, price fluctuations and supply substitutions. With Colonial behind you, you’re also armed with a complete, powerful online surety management system. In addition to issuing your own bid bonds, you can expediently order performance and payment bonds, run management reports, check your current and aggregate limits, view your underwriting profile—and more. Come on: let’s get you growing today.
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Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.