Everyone is feeling supply and cost issues amid the pandemic. From the shelves at the grocery store not being stocked with items that have always been available to the cost at checkout, the impact on the consumer is unarguably at an all-time high.
However, it is not only the average consumer at the grocery store that is affected, supply issues and cost increases have affected entire industries. Specifically, the construction industry, and small businesses are affected the most. For example, the Associated General Contractors of America’s Chief Economist Ken Simonson has stated that the construction industry is currently experiencing an unprecedented mix of steeply rising materials prices, snarled supply chains, and staffing difficulties, combined with slumping demand that is keeping many contractors from passing on their added costs. This combination threatens to push some firms out of business.
The following data provides some insight into rising costs of materials, supply chain issues and demand issues. Not only do these issues affect ongoing contracts that have already been executed, but they also affect those contracts that have yet to be bid. Data obtained from producer price indexes posted monthly by the Bureau of Labor Statistics and repeated in the Associated General Contractors of America’s Construction Inflation Alert, dated March 29, 2021, shows that bid prices remained basically stable, rising 0.5% from April 2020 to February 2021. However, the cost of contractors’ purchases, has increased approximately 13% over the same period.
Raw materials can represent 50% or more of the cost of a contract. This increase in cost of materials can cost contractors almost their entire profit. For example, diesel fuel increased 114% between April 2020 and February 2021. The PPI for lumber and plywood jumped 62%. The index for copper and brass mill shapes climbed 37% and the PPI for steel mill products rose 20% as noted in the ACG 2021 alert.
However, since February 2021, numerous materials have risen even more steeply in price and contractors are incurring costs not captured through deliveries that are delayed and shortages of labor (and associated higher labor costs) are all driving up contractors’ costs.
Some examples of how to address this situation could be action by the federal government to end tariffs and quotas that are adding to price increases and supply shortages.
Contractors might also raise their prices to cover the added costs. However, this option has not been feasible to date and profits continue to decline. Owners, including the federal government, and bidders could consider price-adjustment clauses in contracts that would protect both from unanticipated swings in materials prices. In accordance with Federal Acquisition Regulation 16.201, fixed-price types of contracts can provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.
Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. Such contract terms can enable the contractor to build in a smaller contingency to its bid, while providing the owner an opportunity to share in any savings from downward price movements. With the uncertainty of supply costs and material/labor prices, the economic adjustment clause can provide the equitable adjustment that both the owner and the contractor can manage a project more effectively and efficiently.
As noted in the AGC Alert, owners should recognize that significant adjustments are likely appropriate regarding the price or delivery date of projects that were awarded or commenced early in the pandemic or before, when conditions at suppliers were far different. For new and planned projects, owners should expect quite different pricing and may want to consider building in more flexibility regarding design, timing, or cost-sharing. During these times of cost uncertainty, contractors must monitor costs and delivery schedules for materials and communicate information with owners, both before submitting bids and throughout the construction process.
Karen Ashton, P.E. is federal services program Manager at Florham Park-based Matrix New World Engineering.