Contracts and Claims
Timely articles covering the most pressing issues facing construction firms in the Midwest 

Getting Adjustments When Material Prices Increase Requires Planning

When prices of construction materials fluctuate wildly as they did with steel in 2004, a question naturally arises in specialty contractors’ minds: Are we entitled to get any price adjustment to our fixed-price contracts if major material prices go up too much? The unsatisfying answer to this question is: It depends.

As a rule of thumb, specialty trade contractors that have not gone out of their way to negotiate a well-written force majeure contract provision will be legally entitled to price adjustments in an extremely limited number of cases. A white paper titled “Force Majeure,” published by the American Subcontractors Association (ASA), explains:

Courts will excuse failure to perform a contract due to a force majeure event, but only if the circumstances fit within the narrowly-defined doctrines of “impracticability,” or if the contract has an express provision dealing with force majeure events, commonly called a “force majeure clause.” In fact, the reason to include a force majeure clause in a written contract is because the law of impracticability is so narrowly defined that it provides little protection from unexpected events.

The point about impracticability is that a specialty contractor would have a hard time convincing most judges that any increase in prices made its execution of the contract “impracticable.” Courts would more likely see a large increase in material prices as a risk inherent to the business of construction than as an unforeseeable (and excusable) event preventing the specialty contractor from performing its work at the agreed-upon price.

ASA’s white paper suggests that the specialty contractors that want adjustments for large price increases are better off proactively seeking contract language that entitles them to equitable price increases rather than simply relying on the law. A well-written force majeure clause that explicitly gives the specialty contractor more rights than the legal doctrine of “impracticability” would provide better protection.
Negotiating an effective force majeure clause is the challenge for specialty contractors to meet if they want assurance of equitable price adjustments. ASA’s white paper points out several factors to keep in mind when approaching this task:

· The force majeure clause needs to explicitly rebut the legal presumption that the specialty contractor is entitled to adjustments only when work is “impracticable.”
· Force majeure language that specifies a measurable condition as qualifying the specialty contractor for an adjustment, such as a material price increase of 20 percent, likely will be more effective than vague language such as a “major” increase in material prices.
· Most industry model documents for fixed-price contracts do not contain language giving subcontractors the right to equitable price adjustments.
· Many force majeure clauses limit the specialty contractor’s adjustment to an extension of time but are silent on, or deny, price adjustments.

Learn more about force majeure clauses. Visit ASA’s Web site at www.asaonline.com and click on “Stand Up! for Subcontractors” or call ASA at (703) 684-3450.