Last year, the COVID-19 pandemic strained contractors as illnesses, quarantines and lockdowns made it more difficult to get employees on the jobsite to get work done. Now, as the economy begins to reopen, contractors are seeing increased demand for their services. The problem, however, is that contractors are now facing dual challenges: (1) hiring skilled workers and (2) increasing material costs.
The result has been both delays and increased costs, which too often cut into a contractor’s bottom line. As contractors look to maintain profitable projects, the following is a summary of how contractors can protect themselves against being left “holding the bag.”
Labor Is Short and Material Prices Are Skyrocketing
There is no question that skilled workers are hard to find. According to the U.S. Chamber of Commerce Commercial Construction Index, 88 percent of contractors in Q2 2021 report moderate-to-high levels of difficulty finding skilled workers and, of those, nearly half (45 percent) report a high level of difficulty.
Material shortages (and the increased costs that go with them) are another significant challenge for contractors. In Q2 2021, almost half (46 percent) of contractors say less availability of building products has been a top concern – up from 33 percent in Q1.
Lumber is the most in-demand product, which is the result of a boom in residential construction during the pandemic. According to the U.S. Chamber of Commerce, about one-third (33 percent) of contractors report that they are experiencing a shortage in wood/lumber, up from 22 percent in Q1 2021. For comparison, just 5 percent of contractors surveyed reported a lumber shortage in Q3 2020. Steel and pipe are the next most often reported shortages: 29 percent report a shortage of steel (up from 14 percent in Q1 2021), while 12 percent report a pipe/PVC shortage.
These material shortages can affect a contractor’s bottom line, and the related delivery delays could result in liability under the construction contract.
Knowing Your Subcontract
Each construction contract allocates the risks of material shortages differently. Some contracts (e.g., cost-plus contracts) put this price risk on the owner, while others (e.g., fixed price) place this price risk on the contractor. A thorough understanding of the applicable contract is crucial in order for contractors to fully understand their potential exposure as material prices continue to fluctuate.
Delays in delivery resulting from material shortage may also result in direct monetary loss to the contractor. In some instances, a contractor may be on the hook for liquidated damages if a delay in delivery of materials causes the contractor to delay its work on the project. In today’s world, liquidated damages can add up quickly if materials are delayed weeks and months into the future.
However, some contracts provide for an extension of time if the contractor’s delay results from unforeseen delays in material deliveries. For example, AIA A201-2017 Section 8.3 states that “[i]f the Contractor is delayed at any time in the commencement or progress of the Work by . . . unusual delay in deliveries . . . then the Contract Time shall be extended for such reasonable time as the Architect may determine.”
An effective way to manage increasing material costs in future contracts is through the addition of an “escalation clause.” The typical escalation clause allows for an adjustment to the contract price in order to accommodate for increases in material costs over a certain threshold. For example, an escalation clause may provide for an upward adjustment to the contract price if the price of lumber increases more than 15 percent during the term of the contract. The adjustment of the contract price after the triggering event can help to mitigate the financial effects of increasing material prices for the contractor.
Escalation clauses often only apply to “designated materials” specified by the contractor at the time of signing the contract. In that case, only price increases to the designated materials will prompt an adjustment to the contract price. Escalation clauses also often have strict notice requirements. If a contractor fails to properly notify the owner or architect within the notice period, it could lose out on an adjustment to the contract price. If contractors are thoughtful regarding designated materials at the outset of the contracting process and give prompt notice of material price increase during the project, an escalation clause can be extremely beneficial.
While managing material and manpower shortages is difficult for any contractor, signatory contractors also have to be aware that these issues could have implications for their collective bargaining agreement. Read on for some of the more common CBA considerations to consider regarding shortages and delays. (Reminder – the language of every contract is different and disparate practices may inform the interpretation).
- Hiring Clauses: as discussed in a previous post, a signatory contractor’s CBA may require solicitation of manpower from the union’s hiring hall before looking elsewhere for qualified workers.
- Travel Provisions: the CBA’s travel provisions could restrict a contractor’s ability to solicit workers from outside the local’s jurisdiction, or they may specify the contractor’s obligation to reimburse certain expenses, etc. for workers who travel from another union’s jurisdiction.
- Show Up Pay: employees who are sent home for lack of work (as a result of material shortages) may be entitled to “show up” pay under the CBA.
- Laying Off Workers: signatory contractors should be mindful of any “layoff,” “seniority,” or “just cause” provisions in their CBA before commencing a layoff of union workers. While the decision to lay off employees for lack of work is generally reserved to the employer, depending on the CBA, signatory contractors could be required to bargain over the effects of such layoffs.
- Some contracts contain a “force majeure provision,” which may permit an employer to take unilateral measures that would otherwise require bargaining with the union.
- In the event of layoffs, signatory contractors would need to contemplate their obligations under state and federal laws, including the Worker Adjustment and Retraining Notification (WARN) Act.
The labor and material shortages facing contractors make it more important than ever to be well-versed in your construction contract and your collective bargaining agreement. Ensuring your construction contracts include appropriate provisions relating to delays (for delayed deliveries or lack of qualified workers) and “escalation clauses” (for addressing cost increases for certain materials), a contractor can protect their business against spending time and money finishing an unprofitable project.