Inflation is here to stay for a while. While many predicted it would be a transient visitor, the most recent economic reports show it continues to rise and is reaching levels we have not seen in the United States for decades. In addition to planning for increased fuel costs, rising commodity prices for construction materials, and other impacts on the bottom line, it’s time to consider how to make some changes to your construction contracts to help address the ongoing problem. Here are five clauses you should give considerable thought to revising; and if they are not in your contract, add them in before your next project.
Tight contracts are another tool to combat inflation
1. Price Escalation Clauses: Many people confuse these with force majeure clauses. They are a distant cousin, but they are not the same thing. Stated differently, neither price escalation clauses nor force majeure clauses address inflation-related issues completely. As lawyers say, they work together like a belt and suspenders if drafted properly.
Price escalation clauses are used to address the rise in costs to build the project. They tend to go more directly to hard construction costs like materials, fuel and other things needed to operate on the project. Price escalation clauses should usually have triggers in them that result in the execution of a change order or some other mechanism that automatically increases the contract price to pay for those hard costs.
In addition to planning for increased fuel costs, rising commodity prices for construction materials, and other impacts on the bottom line, it’s time to consider how to make some changes to your construction contracts to help address the ongoing problem.
2. Force Majeure Clauses: These clauses also deal with events that make it difficult to perform the work. While you can identify price escalations over a defined amount as a force majeure event, these clauses are typically used for things other than hard costs. This includes acts of terrorism, governmental orders (think COVID, for example) or unusual weather events that shut down job sites. They are designed to create an avenue for excusable delay, and in extreme circumstances, provide a way for a contractor to walk away from a project. Do not make the common mistake of thinking a force majeure clause automatically covers price escalations. They are different.
3. Change Order Clauses: Inflation drives a lot of things, including the need for more money or time to complete the work. This is where change orders come into the picture. Change orders, however, are also places where contractors often bleed money because of hidden, unaccounted for costs. Make sure your change order clause is simple to understand and execute. These clauses should also be balanced so that neither side can abuse them. It’s agreeable for an owner to insist that extra work performed without a change order not be billable; but it’s equally agreeable for a contractor to insist on getting a signed change order before performing extra work. Clarity is exceptionally important in this clause.
4. Termination for Convenience: As a construction litigator, I generally don’t like termination for convenience clauses. They often provide too easy an out for a party that does not like how the project is going. There are rare circumstances, though, where they can work if put under strict parameters. By way of brief example, a termination for convenience clause where the triggering event is described as an increase in the cost to perform the work that exceeds a certain amount might be agreeable. Termination for convenience clauses should never be used as an out for an improper termination for cause though.
5. Forum Selection Clauses: This is a hidden one. While it only comes into play if a dispute arises that requires an action in court, having to litigate a dispute in a far-off state can drive up already high costs on the job. When the higher cost of completing the project is already being increased by having to pay a lawyer or law firm to fight over something, having to pay the extra cost of travel and other costs associated with fighting in another locale can add up quickly. This is certainly not one to blow up a deal over; but consider it as more important in the current environment.
This list is not dispositive. There are other clauses that can have an impact on your projects while the construction economy works through the current inflation crisis. In the end, the point is to take each project as its own challenge and think through where inflation might cause the biggest potential exposure. Those are the places to negotiate a little harder. And while it’s painful at times, remember that sometimes it is better not to work than to agree to a bad deal and pay the other guy to work.
Josh Quinter is a commercial litigation attorney, with a focus on construction law. He is also a member of the Board of Directors and a department chair at his law firm, Offit Kurman. Active in a number of construction trade and business organizations, he presently serves as the president of the Mid-Atlantic Chapter of the Metal Building Contractors & Erectors Association (MBCEA), serves on the MBCEA national board and is the organization’s general counsel. Contact him at jquinter@offitkurman.com or for more information go to www.offitkurman.com/attorney/joshua-quinter.
