Source: National Association of Home Builders
Note: This article serves as a follow-up to a recent NAHB post meant to assist members in evaluating their contracts given the ever-changing situation with the coronavirus.
The coronavirus pandemic has caused many disruptions and may well impact residential construction in the coming weeks or months. Last week, California issued a far-reaching “stay-at-home order” for its 40 million residents. This order is required except for those needing to get food, take care of a relative, or go to an essential job in one of 16 sectors specifically identified. Other states and cities are following suit.
With this most recent development, companies should evaluate their businesses, including their contracts, and be prepared for the possibility that building materials prices may increase as a result of supply chain disruptions.
As part of an overall contract assessment, one of the most efficient ways to address unexpected price increases in building materials may be to use an escalation clause. If you do not already include an escalation in your contracts, consider adding one.
Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control.
For companies with existing contracts, if they do not already have an escalation clause or similar provision in place to address increased prices, absent an amendment to the contract adding one, they may have difficulty trying to recover those higher costs. Consider consulting with your attorney for additional guidance and assistance with existing contracts.
Having an escalation clause should not be limited to contracts with a potential home buyer but should also be used in builders’ contracts with suppliers, subcontractors, or others who may be relying on building materials to complete all or part of a project.
Finally, think about your business, evaluate your supply chain and identify other options in the event some of your materials are delayed or your costs increase. Have a plan in place to handle potential supply chain disruptions.
NAHB’s Construction Liability, Risk Management and Building Materials Committee has a sample cost escalation clause contract addendum.
For all of NAHB’s resources on the current crisis, visit the Coronavirus Preparedness and Response page on nahb.org.