Builders and Contractors Exchange
Weekly Bulletin: 08 Mar 2004
Price Escalations Under Federal Construction Contracts
By: William E. Franczek
This is the 2nd Article in a series on the impacts of increased metals prices on the construction industry.
In last week's article we discussed the recent price increases for steel, aluminum and copper, and the general impact this was having on the construction industry nationwide. This week we will discuss the contractor's rights and remedies under federal law, which governs contracting with the federal government.
Most construction contracts with the federal government are firm-fixed-priced contracts. They principally take two forms: Lump-Sum and Unit-Price Contracts. The former is typically used when a lump sum is paid for the total work or defined parts, while the latter is used when the government pays a unit price for a specified quantity of work units such as in grading, paving, outside utilities and the like. In most of these types of contracts, the general rule is that a contractor assumes the risk of unexpected cost increases in the absence of a clause shifting such risk to the government.
A couple of exceptions exist to the general rule. First, the government is allowed, under certain circumstances, to include an "economic price adjustment clause" in fixed-price construction contracts. This is typically done when (1) it is customary for the type of work being acquired; or (2) when omission of an adjustment provision would preclude a significant number of firms from submitting offers or would result in offers including unwarranted contingencies in proposed prices. So, before you throw in the towel and absorb those costs, look closely at your contract to see if it may contain an economic price adjustment provision.
Another area in which dramatic price increases have come into play in federal construction contracting is when commodity shortages have made performance of the work impossible or at least "commercially impracticable." In general, if the contractor can show that at the time it entered into the contract such price increases were unforeseeable, and that no supply or substitute currently exists, performance may be excused. However, a mere increase in cost, albeit a large one, generally will not excuse performance. A future article will address the impact of price escalations and shortages on delays to construction projects, and the contractor's right to excusable or compensable delay.
For the foreseeable future, one approach to this dilemma might be to approach the local federal agencies through industry groups to request that the government add economic price adjustment clauses to federal solicitations. Otherwise, it appears that you have no choice but to add contingencies to protect yourselves from such increases.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.