Risk Management: Supply Chain Disruptions and Market Price Volatility in the Construction Industry | Arent Renard
Cost volatility and longer delivery times for materials
Over the past year, the construction industry has seen a sharp increase in the price of common building materials due to impacts on production, supply chain delays and material hoarding. For example, the Associated General Contractors of America reported that the costs of general contractors increased by almost 13% from April 2020 to February 2021. Likewise, until very recently, lumber prices and plywood rose 62%, steel prices rose 20%. , diesel fuel prices rose 114%, and copper and brass prices climbed 37%. These markets remain volatile, with recent reports of rapid price drops for certain materials.
Contributing to price volatility, shipping and transportation initially deteriorated due to weak demand for supplies and industry decision-making regarding inventory control, and are now struggling to keep up. growing demand.
As a result, project owners and contractors not only face higher price threats and longer lead times at the start of projects, but also uncertainty regarding price and schedule impacts throughout. construction.
Risk allocation in an uncertain market
Project owners, contractors and design professionals should anticipate unexpected volatility in project costs, potential supply shortages, and longer project durations. They can do this through project planning and contractual arrangements that address these issues.
- Project planning. Project owners, design professionals and entrepreneurs should actively communicate on market indicators and trends, and commit to tackling the challenge of a volatile market in a cooperative manner, recognizing that attribution of risk is any volatility in material prices and delays at one party may stall or cancel the project. The parties should focus on a sourcing strategy that takes into account current industry data, including the current health and near-term prospects of the contractor’s existing supply chain.
- Alternative materials. Project owners, design professionals and contractors must remain open to the use of alternative materials and procurement options, and create contractual arrangements that allow for the same. For example, if the timber supply is too uncertain and the cost is too high, they must take into account the relative stability of the supply and the difference in cost of alternative materials such as bamboo or bamboo. concrete, assuming these alternative materials meet code requirements and your project’s performance specifications.
- Contract provisions. Contracts should be clear regarding (1) the responsibility of contractors to consider supply chain impacts and known prices at the time the contract amount and timeframe are negotiated, or for design professionals, at the time specifications and other construction documents are prepared, and (2) the relative liability of the parties for unforeseen cost increases and supply chain interruptions / delays. Balancing of interest can be solved by combining (1) establishing a contractual contingency for price escalation or covering some or all of the costs of acceleration efforts to mitigate delays in supply chain in maximum guaranteed price contracts, (2) using change orders with an appropriate cost allocation in stipulated sum contracts, (3) allowing partial absorption of inevitable cost increases of materials through adjustments in labor rates or a reduction in contractor’s fees, (4) requiring the professional designer to specify materials, equipment and systems from manufacturers or suppliers where there is no has no evidence of supply chain disruption upon completion of construction documents, or of redesigning at the design professional’s expense if they did not consider known disruptions chain or price escalation, and (5) predicting trigger prices, which, if met, require the purchase of materials to cap the price increase.
Although this is not an exhaustive study of the mechanisms for dealing with the risks of supply chain disruption and market price volatility, it highlights the importance of the cooperation of project owners. , design professionals and contractors as they examine and address these realities before entering into the construction contract. Failure to do so can lead to shelved projects or disputes in the event of unforeseen supply chain disruptions and price escalation.