Legal and Regulatory

Contract Disruptions: Navigating Supply Constraints and Labor Shortages

In the future, builders and owners want to be prepared for the unexpected—and should plan for contingencies that all projects will encounter.
By Greg Ross
January 4, 2022
Topics
Legal and Regulatory

The biggest worries in today’s economy—supply chain disruptions, labor shortages and the worst inflation in decades—are creating big headaches in the construction industry. What’s worse, large projects underway are often based on contracts hammered out pre-pandemic, before the uncertainties and disruptions that spread around the globe with COVID-19. Construction firms find themselves executing on contracts signed when the potential for delayed timelines and rising costs seemed more remote.

A recent report from the U.S. Chamber of Commerce finds almost all contractors (93%) say they are experiencing a shortage of an important product such as steel, lumber or copper. A rising number of companies on commercial projects (54%) also cite difficulty finding skilled workers. Grant Thornton clients, among them some of the country’s biggest construction companies, report that sourcing materials and hiring workers is a bigger challenge today—and more expensive—than at any other time in recent decades.

These are issues that can easily threaten the already thin profit margins of many builders. Construction firms need a sharp focus on how to manage through this period while avoiding the pitfalls that might damage relationships with owners or subcontractors. And even as they do this, they need to plan how to address ongoing shortages of supplies and labor so they can successfully tap into the new business opportunities stemming from the giant boost in infrastructure spending Congress recently approved.

There are several ways builders can adjust.

Know the contract

The first step: Review your contracts. Attorneys should be looking for language that’s relevant to the question of who will be responsible for increased costs or delays and what can be billed to the owner. They may also be searching for any communication relevant to such issues, even outside of the actual contract, if it will help provide leverage as change orders are negotiated.

Companies may benefit by developing a contract cheat sheet, listing ten to fifteen key points to be discussed with owners and subcontractors to help align expectations among all parties. Does everyone agree on what documentation will be provided to support a change order? Is there clarity about what’s covered under general conditions? On what line items can the general contractor’s fee and insurance be charged?

Bigger or more sophisticated companies are likely to have included more detailed provisions about how costs will be passed through and who bears the burden for delays. When a contract lacks such specifics, the cheat sheet can help organize a productive discussion to anticipate and avoid disputes. This should include efforts to ensure that language from the owner agreement is carried through to subcontractors.

Simple differences of opinion in the interpretation of contract language can lead to significant changes in the final contract price. A contract cheat sheet can help to head off misunderstandings, smooth the process and avoid conflicts.

In the current environment, contractors and owners are facing unusual delays and cost increases. They are grappling with what counts as unavoidable and ultimately will be paid for by the owner. When local governments shut down construction sites early in the pandemic, that typically was viewed as an unanticipated circumstance, while the gradual tightening of the supply of building materials or the recent shifts in the labor market might be viewed as foreseeable and something contractors were supposed to manage. Each construction project has faced unique hurdles during this unprecedented time, but in all cases, current circumstances put a premium on understanding the contract and having transparent dialogue.

Focus on communications

A second important point to remember is that much will depend on whether the owner believes the contractor is doing everything possible to keep things running smoothly and get the project done on time. To that end, it’s vital for the builder to communicate proactively and transparently.

Appropriate supporting documentation can make it much easier for the owner to understand the cost and scheduling hurdles a project faces—and make it easier for a contractor to stand their ground on expenses. For example, amid pandemic-related site shutdowns and worker restrictions, contractors that were able to provide a more complete picture by presenting time sheets or daily activity logs were more likely to get owners to accept the situation.

As much as owners may know, in a general sense, about supply concerns and building material pricing, the provision of specific information by the contractor about how a supplier is charging more for sheetrock or lumber or some other input is going to help the owner to get comfortable with how rising costs are affecting their project.

In a similar vein, weekly conversations can be helpful. Such interactions can demonstrate progress on the worksite while bringing to the attention of the owner issues as they arise. This, in turn, will help the owner understand the need for changes to the contract, should they be necessary. If the contractor does not regularly update the owner, reaching agreement on change orders will be much harder.

Companies that have effective practices for keeping the owner well informed about cost and timeline concerns are likely to be recognized and appreciated—with fewer disputes over contract language and greater satisfaction for all parties involved.

Looking ahead

One lesson of the past two years surely is that contracts can be tighter, with language spelling out how to adjust for unexpected events or market changes. Construction companies may also be looking for opportunities to lock in supplies at a fixed cost for future projects. Contractors have learned a lot from recent events, after dealing with pandemic work stoppages last year, labor shortages this year and ongoing worries about the availability and price of building materials.

In the future, builders and owners want to be prepared for the unexpected—and address their contracts, communications and planning to the contingencies that every project, in some way or another, is likely to encounter.

by Greg Ross

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