ConstructionPro Week, Volume: Construction Advisor Today - Issue: 110 - 06/03/2011

Protecting Contractors Against Cost Volatility

The Changes clause of a construction contract gives the project owner the right to alter the scope of work, while making equitable adjustments to the contract price and schedule. The Changes clause also gives rise to the concept of a “constructive change;” an owner directive which, although not labeled as such, alters the contract requirements. But does the Changes clause require an owner to issue a change order when changed market conditions impose higher performance costs on a contractor? That question was recently presented to a Utah court.

Between the time a highway contractor bid and signed a fixed-price contract and the time the contractor performed the work, the market price of liquid asphalt oil almost tripled. The contractor argued that this “commercial impracticability” mandated a price adjustment under the Changes clause. The court disagreed. While commercial impracticability is sometimes used to excuse a contractor from performance, there is no case law supporting the concept of a mandatory price increase under the Changes clause. The risk of increased performance costs rested squarely with the fixed-price contractor.

Should construction contracts include some sort of economic price adjustment clause, shielding contractors from the most extreme cost escalation? Or is this completely inconsistent with the traditional allocation of risk in fixed-price contracting? I’m sure many will be quick to point out that had material costs dropped by two-thirds the contractor would probably not have been requesting a price adjustment. I welcome your comments.

Featured in Next Week’s Construction Claims Advisor:

  • Delay Damages Authorized for Only One Type of Event
  • Email Satisfied Site Condition Notice Requirement
  • Commonly Owned Developer and Constructor Were One

 

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