THE LUMBER CRISIS’ IMPACT ON CONTRACTORS & WHAT THEY CAN DO TO PROTECT THEMSELVES FROM FINANCIAL BURDEN
For home builders and contractors, the affects of the COVID-19 pandemic have been particularly burdensome. With lumber prices nearly tripled since last Spring, the financial burden on the construction industry has been significant.
In fact, due to increased demand and supply constraints, the spike in the price of lumber has caused the cost of building an average single-family home to increase by more than $24,000 since April 2020 according to the National Association of Home Builders.
Although the housing market continues to lead the nation’s economic recovery in the wake of COVID-19, these sharp price increases threaten housing affordability for all Americans.
Find out what these unprecedented lumber price increases mean for the future of the construction industry and what contractors and home builders should expect for 2021.
Lumber Price Increases in 2021
As illustrated by the below chart, lumber prices have hit historic highs. Economists hope that with the roll out of the COVID-19 vaccine, production will increase, and prices will stabilize.
Nevertheless, even with amplified production, increased lumber demands will make it more difficult for the supply chain to catch-up and for prices to stabilize.
What does increased Lumber prices mean for Contractors?
Contractors should consider negotiating price escalation clauses to help mitigate the financial burden on their business.
A price escalation clause will help contractors clarify who bears the risk of a significant price increase in material as a result of events beyond the contractor’s control.
How a Price Escalation Cause can help Contractors during inflated Lumber Prices
There are various types of price escalation clauses that may be appropriate for contractors when it comes to mitigating inflated lumber prices.
For example, percent-change price escalation clauses allow a contractor to recover costs once their budged costs have increased by a certain percentage.
In most cases, large jobs are bid on by contractors several months in advance and take years to complete. Price escalation clauses can financially protect the contractor by capping the risk of unpredictable material costs over the life of the project.
Force Majeure Clause to protect Contractors
Another provision Contractors should consider is the excusable delay provision. The AIA A201 standard form General Conditions has the following excusable delay provision, sometimes referred to as the Force Majeure clause.
The Force Majeure clause states:
“If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner; or Separate Contractor; (2) by changes ordered in the Work; or (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or, adverse weather conditions documented in accordance with Section 220.127.116.11, or other causes beyond the Contractor’s control; or (4) by delay authorized by the Owner pending mediation and arbitration; or binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines may, justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine.”
Under this provision, certain disruptions from the virus, including material delay may be deemed beyond the contractor’s control. But these provisions are frequently modified and are separate and distinct from price escalation clauses.
Therefore, it is essential to understand what your contract says and, when entering new agreements, ensure that the negotiated language fits the realities of the current and ever-changing landscape.
Will lumber prices go down in 2021?
This is the question many contractors and home builders want to know as they plan for the future. While there are is no clear answer, we can say that the escalated lumber prices are largely due to the insufficient domestic production and lumber supply chain curtailments.
While there is hope that the COVID-19 vaccine will provide relief to the increased lumber prices, there is no definite answer as to if, when and how much lumber price will decrease.
Impact on Contractors & What They Can Do
With that said, the best option for contractors when navigating the lumber crisis is to implement contractual clauses that protect from potential financial burden caused by inflated material prices.
When evaluating price escalation clauses, it is important that you seek legal counsel. The Construction Attorneys at Garcia & Milas Law Firm are ready and available to help contractors navigate contractual provisions related to increased lumber and material prices.
By Jaime Paoletti, Garcia & Milas, P.C.
Jaime Paoletti is an attorney at Garcia & Milas, P.C. who represents contractors, owners, developers, subcontractors, and design professionals. She routinely drafts and negotiates construction contracts to meet the needs of each project and helps her clients navigate key contractual provisions such as insurance, price escalation, excusable delay, and force majeure.
This publication is for general information purposes only and is not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.