Managing Construction Cost Escalations and Supply Delays: How to Protect Yourself

Before the COVID pandemic, cost escalations and supply delays during construction were expected but manageable. During a typical construction project, an owner or general contractor would encounter a price escalation about once a quarter. But the pandemic brought on many unexpected problems (like the toilet paper shortage). 

One of the biggest problems the pandemic has created is the impact on the supply chain. The supply chain disruption is now causing cost escalations and supply delays that are happening with an amplified frequency and becoming difficult to manage.

Let’s dive into how to manage these construction cost escalations and supply disruptions.

What were construction price escalations and supply delays like pre-COVID?

Whether you had a GMP or lump sum contract, the general contractor would begin to purchase materials for a project as soon as the contract was released. A general contractor would purchase the most important materials needed first if there was a long lead time to receive delivery of the product and that product was needed during a certain phase of the project.

Before the current supply chain issues, there still was a need to purchase certain supplies early to mitigate the long lead time and the risk of a delivery delay and/or cost escalation. Some of the most common materials purchased first because of delays and/or cost escalations were A/C units, electrical components, and finished materials like tile, carpet, wood, glass, doors hardware – though these varied by region or market.

Depending on the materials, cost increase, and/or delay time, the general contractor and owner would discuss whether to keep the current product order or cancel and find a suitable replacement. In some cases, depending on the price increase and the contract, a general contractor would absorb the cost themselves.

But the COVID pandemic has changed all that.

What are construction cost escalations and supply delays like now?

Since 2020, owners and general contractors have seen the cost of most materials rise exponentially and delays increase with no end in sight. Where before a contractor may have been able to absorb the cost increase, escalations are now so much that contractors can’t – and won’t – absorb the difference.

Additionally, where before the owner and general contractor had the option to swap out a delayed or cost increased product for a suitable replacement, now that is not an option. 

When a manufacturer informs a customer of a price increase and delay, the customer has two choices. One, the customer can pay the increased amount and deal with the delay. Or, two, they can cancel the order and look for materials at a lower price and quicker delivery. But, in reality, sometimes material availability is scarce and options are limited. Most manufacturers know this and will be able to sell the canceled order for the new increased price.

How do you manage construction cost escalations and delays?

With the longer delays and variable price escalations on construction materials, it makes starting a project risky since there isn’t much control over these factors for either the owner or general contractor. Generally, the terms and conditions in a contract will provide an owner with some protections from escalation and delays. 

The owner or your owner’s representative can negotiate with the general contractor to share the risk of cost escalations. But this is becoming harder as the general contractor may not agree to these protections since they have no control over the current supply chain issues. 

Here are 2 possible options to help manage and protect the project budget and timeline from cost escalations and delays.

Cost Escalation Contingency

One potential protection an owner can have is cost escalation contingency language built into the contract.

The essence of this contingency is an allowance added to the budget that allows for cost escalations of certain materials. A general contractor can use this allowance to offset the increased cost so long as they submit proof of the escalation along with the old and new price. Since the allowance is set for a certain amount, the contractor will need to choose wisely how they want to use the allowance.

Additionally, the contingency would require a contractor to submit an alternate product that is available or in line with the price point of the budget. This will also require the contractor to work with the architect and designers to find a solution that best fits the project. The owner or the owner’s representative will also be involved and help the team work together to find a suitable solution.

Having an owner’s representative – like The Common Area – means you have support in  negotiating this language into your contract to ensure honesty, transparency and trust in the process. As an owner’s representative, it’s our responsibility to help facilitate solutions and navigate challenges during these hard times of cost escalation and construction supply delays.

Liquidated Damages

Liquidated damages language requires the general contractor to agree to finish the project in a certain time period (minus any delays outside of their control). For every day the contractor goes over that time period, there is a daily penalty that can range significantly based on the dynamics of the project. It really depends on what is at stake for the owner and project. The amount set must be based on actual damages the owner can prove to a judge.

Contractors are becoming reluctant to agree to liquidated damages language in a contract because most delays are unpredictable. Additionally, it’s becoming more difficult to enforce this provision since most delays are being seen as valid with the current supply chain issues. 

Need more help navigating construction cost escalations and supply delays?

With The Common Area acting as your owner's representative, I can help negotiate with your general contractor to get the best protection for your project during these uncertain times. Let us  apply our industry knowledge and experience to make sure your project is completed to your specifications while staying on budget.

Email or call to set up a meeting today.

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