Recent federal figures released by the Associated General Contractors of America (AGC), and reported on by Roads & Bridges, indicate that January 2013 saw a significant increase in construction material prices.
Things are not looking better for February either according to Ken Simonson, chief economist for AGC, who says that prices for gypsum, wallboard, lumber, insulation and architectural coatings like paint are making huge leaps “based on pump prices for diesel fuel and price announcements by various manufacturers” which will rise “significantly higher in February.”
What does this mean for mechanics lien claims? Well, unfortunately, it’s a set up for contract and payment disputes, which usually results in increased mechanics lien filings.
Why Material Price Increases Cause Disputes
Material price increases are a fact of business in the construction industry, but nevertheless, they cause real problems constantly.
Most construction contracts put the risk of price increases on the bidding party. This is because contractors and subcontractors bid to complete a project at a certain lump sum price, and when the bid is made, it contemplates a certain cost for materials. The contractor or subcontractor can expect those material prices to increase at a regular rate and incorporate that into their bid, but if a project is delayed and takes too long or if material prices increase at an excessive rate, the price increases eat into profits and sometimes render the project unprofitable.
Most construction contracts put the risk of price increases on the bidding party.
When price increases are too significant, or a project takes too long such that increases are too drastic, the contractor is unable to complete the project for the bid price. And even if they are legally required to complete the project, reality may set in and they may be financially unable to complete the project. This causes project delay, clogs up the payment process and leaves some parties looking to the mechanics lien remedy to protect or enforce their payment rights.
What You Can Do To Insulate Your Company From Material Price Increases
First, you should always preserve you right to file a lien because you can never guarantee complete avoidance of these situations.
Sending preliminary notices at the start of every construction project will assure you that if the going gets tough and you aren’t paid (for reasons sometimes beyond your control), you’ll have a strong secured claim.
Second, you can have a good construction attorney draft contractual provisions to shift the risk of price increases onto other parties like the developers or other contractors up the chain.