In the latest issue of The Wright Toolbox:
- It is Time to Address the Potential Impact of Tariffs in Construction – read now
- Pushing the Government Contracting Officer – read now
Is It Time to Address The Potential Impact of Tariffs in Construction
As everyone knows, the Trump administration has taken steps to and/or threatened to impose a variety of tariffs on a variety of commodities and products, including items such as steel and aluminum that can have an impact on construction projects. The administration announced tariffs of 25% on imported steel and 10% on imported aluminum. According to the Engineering News Report (ENR), after the tariff announcement U.S. steel-beam mills announced two price hikes—$45 per ton and $35 per ton—for most beam products, following a $20-per-ton surcharge for floor stock in early April. The ENR reports that benchmark U.S. steel prices have risen nearly 40% since the beginning of the year. Imagine bidding a job with your prices for steel held for 60 days and the tariffs increasing the costs of the steel you will need to buy by 40%. Steel and aluminum are just two items, the retaliation tariffs from other countries on other items and the potential responses from the Trump administration could seriously impact the profitability on a project.
Some companies rushed orders for steel to get their project steel before the price increases, but that approach only had a short window of opportunity. The tariffs were imposed under Section 232 of the Trade Expansion Act. The Act allows for petitions to be filed for exclusion from application of the tariff, but that approach is not likely to be successful. According to ENR, more than 20,000 petitions for exclusion have been filed so far, but only 91 have been ruled on. A Senate Committee has indicated that it will launch an investigation into companies that are possibly illegally inflating prices, but the outcome of such investigations are uncertain. Given the market uncertainty and the potential for huge price swings, it is time to revisit price escalation clauses in your contracts. Traditionally, the contractor bears the risk that costs will increase during the performance of the contract in a fixed price contract. A price escalation clause is a provision in a contract that addresses whether a party will be able to recover price increases/decreases for materials that have occurred since bid submission or the time the contract was made and when the materials were ordered. For example, the ConsensusDocs Standard Agreement and General Conditions Between Owner and Constructor provides “[t]he Contract Price . . . shall be equitably adjusted by Change Order for additional costs . . . resulting from any change in Law, including increased taxes, enacted after the date of this Agreement.” ¶ 3.21.1 ConsensusDocs 200 – 2016.
In today’s market, when the parties are negotiating a contract a discussion must be had regarding the risk of increasing material costs. Owners will want to eliminate the risk of increasing prices by barring any price escalation. General Contractors will want to flow that limitation down to its subcontractors and suppliers. Subcontractors and suppliers will want to shift all of the price increase upstream to the general contractor and owner. Of course, excessive risk shifting in either direction can lead to unintended consequences. For example, if an owner and general contractor bar any price increases in the bid documents or contract, such risk shifting will lead to price increases in the bids overall as the subcontractors and suppliers are forced to estimate the potential impact of increasing material costs in the future. Such “estimating” can lead to unnecessarily high bids. If the estimates are bad and the material cost increases are large enough subcontractors and suppliers can fail which adds even more costs to the general contractor and/or owner. More reasonable price escalation clauses can be negotiated with material price increases being shared on a percentage basis that changes depending on the amount of the increase. Sharing the burden may prevent a larger problem. Regardless of your position in the construction tiers, with a potential trade war looming, everyone in the process must start considering what to do with the material price increase risks.
Pushing the Government Contracting Officer
by Don Walsh
Anyone who has spent any time working with the government recognizes several things. First, government contracts can be lucrative and a steady source of income and cash flow. Second, government contracts are long, boring and incorporate a book of contract clauses found elsewhere. Third, government agencies move at their own pace and on “government-time” which may not match the standards typically found in the commercial world. These certainties frequently lead to frustration in managing expectations and getting the government to do what the contractor needs to keep the business and contract running smoothly. This past December, the Armed Services Board of Contract Appeals (ASBCA) decided Flour Federal Solutions, LLC, and exposed how frustrating government contracting can be and the necessary diligence contractors need to endure to work with the Government. There are required procedural steps before a contractor’s claims for additional compensation or even regular invoicing to a contract can be finalized. Unlike the commercial world where courts stand at the ready to decide such issues, in the government world there are numerous procedural hurdles which must first be overcome. Essential to these steps is a decision on the requested additional consideration by the government contracting agency.
Flour Federal Solutions discussed a factual scenario where the contractor fought for over two years with the Navy to simply stop delaying a decision on the contractor’s claims so that the issue could be brought before the ASBCA for a final resolution. After two years of trying to get the Navy to perform its contractual required review, the contractor finally petitioned the ASBCA to compel a decision on its claim. Like the contractor, the ASBCA was clearly perplexed by the trail of broken promises to provide a decision and ordered the contracting officer to issue a final decision on the claim so it could proceed. This case is an important reminder of the importance of diligence in government contracting. Without the contractor proactively seeking decisions from the government agency, efforts to recoup costs owed may simply be brushed aside or ignored making resolution an even more difficult uncertainty later. To keep the government motivated to resolve and to protect cash flow, contractors should ensure consistent follow-up on requests for equitable adjustments, timely filing claims and appeals to contractually motivate the government to a final resolution.
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