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Builders add contract clauses amid volatile economy

Regional builders are adding new clauses to contracts to protect their interests in an unstable raw-materials market.

Regional builders are adding new clauses to contracts to
protect their interests in an unstable raw-materials market.

Some builders are adding terms that let them re-negotiate
should material prices go through the roof. Other builders bid 5 to 10 percent
higher to cover inevitable price increases.

Contracts always are important to general-construction
contractors.

But builders have to be even more vigilant about the
agreements they sign with developers in a sour economy, and they have to keep
vague language found in early proposals out of final contracts.

The slow economy has resulted in less construction and
stabilized prices. Still, those stabilized prices of metal, stone and other
supplies are relatively  high. And
the lull in raw-materials price spikes is probably just a lull. Builders said
they expect prices to jump again as the market bounces back.  

Contractors try to predict what materials-price increases
are going to be ahead of time, but they aren’t psychics. And in this market,
it’s hard to say what prices are going to be a month from now, let alone six
months or more after papers are signed and the first shovel hits the ground.

Relationships are huge now. If builders haven’t established
strong ties with their customers and suppliers in this economy, they should.
Contractors that have strong relationships with suppliers can lock in prices
more readily, builders said. And companies that work with the same developers
on a regular basis establish trust. That trust creates more working space in a
contract, so builders can adjust prices if their costs jump.

Ephrata’s ACI Construction has a clause in its contracts
that allows the company to renegotiate terms on a project of six months or less
if the developer doesn’t sign off on it within seven days after he or she
receives the bid contract, said Dan Buch, ACI president.

 “We joked
already that (contracts) should say ‘if not accepted by noon,’” Buch said. 

It’s rare that developers don’t accept a bid within seven days,
Buch said. But if they don’t, that provision lets ACI resubmit its contract
proposal because prices might be rising as the developers decide, he said. ACI
is a commercial contractor, building mostly retail, industrial and church
facilities. This year, the company completed a multi-million dollar,
54,000-square-foot embryo facility in Ephrata, where eggs are incubated for flu
vaccines. The company also built a steel-and-paper recycling center in
Honeybrook, Lancaster County.

ACI is a design-build contractor. And about half of the
buildings the company puts up are pre-engineered steel structures.

The company locks in prices with its steel supplier just
before it submits a bid. That price is generally good for three to six months,
depending on the project, Buch said.

ACI’s bid normally looks a lot like the final contract. Some
negotiating goes on before papers are signed, but Buch said he tries to be as
upfront as possible about pricing from the start. He doesn’t bid jobs higher at
the start to cover cost increases ahead of time.

“After the customer says, ‘Give me a budget,’ we go back and
negotiate a hard contract. We will look at the prices for what they are at that
time. Hopefully they don’t move a lot and we are within 5 percent or 10 percent
within the proposal,” Buch said.

ACI has terms and conditions in its contracts that protect
the company from weather, Buch said.

The company constantly calls suppliers during a job to
ensure prices remain what they were when the project started. If prices go up slightly,
the company built room in its budget to cover the extra expense.

ACI added a clause this year to its general terms and
conditions to protect the company if prices rise significantly. That clause
says ACI has the right to renegotiate validated increases by suppliers. The
company has yet to use the clause.

“Once we have a validated contract with an owner, we hate to
do that,” Buch said.

A glaring example of what spiking materials prices and
mismanagement can do to a project is the plagued Capitol View Commerce Center
at Cameron and Herr streets in Harrisburg.

The project broke down in April after developer David Dodd
stopped paying contractors. The 215,000-square-foot office and retail facility
still sits idle and half-built.

The project is locked up in liens and lawsuits. Almost $17
million in public funding was promised for the project, too, and that has added
more red tape.

Harrisburg Mayor Stephen R. Reed said audits show Dodd did
not misappropriate the money. He fell prey to ever-increasing materials
increases and inexperience, Reed said.

Sometimes, delays are inevitable. Weather and the
unavailability of materials can destroy timelines. ACI steers clear of
contracts that penalize companies for delays, Buch said.

A developer has to eat price increases caused by delays most
of the time because most contractors have started including escalators in
contracts for certain materials. 

Richard D. Poole doesn’t normally put escalators in
contracts, but he had to several months ago for asphalt because it was too
volatile, he said. Poole is president of York County’s Richard D. Poole general-construction firm. Poole
builds commercial buildings, including medical, industrial and
private-education facilities.

With an escalator in the contract, Poole can renegotiate the
price of asphalt according to what the asphalt indictor index looks like. The
index is a measure of dollars per liquid ton of asphalt.

Paving normally is one of the last things a contractor
completes on a project, so it’s hard to lock in a price for asphalt, and you
can’t order it ahead of time, Poole said.

Asphalt is so volatile because this year, the price of a
barrel of oil went from $80 to $150. The index has come down recently, but in
one year, it doubled, Poole said.

The days of handshake agreements are long gone, contractors
said. But customers follow the news and know why contractors are taking extra
steps to safeguard themselves, builders said.

“As far as prices are going, they see that,” Buch said.
“Years ago, we had a one-page contract, and now, we have several pages of fine
print. We have two pages of general terms and conditions now. A lot has changed
in 40 years.”

 

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