A lawsuit filed on March 9, 2022, by North Carolina supplier BMC West alleges contractor Vision Construction Group violated a purchase agreement by failing to accept an $800,000 delivery of lumber.
Though communication between parties has broken down, it’s clear that the volatile price of lumber — and of construction materials in general — is at the root of this dispute.
According to court documents, Vision agreed to purchase $801,000 worth of lumber from BMC in May 2021. At the time the contract was signed, the price of lumber was roughly $1,397 per 1000 board feet. Shortly after however, lumber prices plummeted, eventually bottoming out in August at around $450 — a 67% freefall.
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After prices fell, Vision is alleged to have “declined to pay for, or take delivery of, the lumber it was obligated to purchase under the contract with BMC,” and instead found a new vendor to purchase from at much lower prices.
Vision failed to formally respond to a demand for performance letter, leading BMC to file suit for breach of contract.
It can be hard to anticipate business agreements going south, but for contractors, learning to live with volatile material prices is unfortunately becoming the norm. The last couple of years has forced construction professionals to navigate atypical, but natural, price movements resulting from the pandemic.
But some have even accused suppliers of colluding to fix prices, resulting in costs higher than the natural supply-demand relationship would create.
Levelset’s Isaac Barzso reported on a 2021 lawsuit in which several contractors accused 10 separate suppliers of attempting to monopolize the lumber market. The suit alleged that some of the nation’s top producers had conspired to capitalize on the economic uncertainty around the pandemic and periodically raise prices together to maximize profits.
As Barzso wrote, these price increases put significant strain on contractors. Higher costs made it difficult to stay on budget and even raised the default risk on construction loan contracts with banks.
In order to stay afloat, many were forced to pass on increased costs to the consumer, resulting in home prices skyrocketing. The increase in the price of lumber alone, experts estimate, added nearly $19,000 to the average price of a new home.
Price swings can be painful in either direction. Fixing prices artificially high under the guise of inflation hurts almost everyone, but BMC’s contract dispute is evidence that even price drops can be a major friction point for contractors and suppliers.
For contractors, it’s important to avoid getting stuck between a fixed bid and rapidly rising expenses. Other than being open and honest in negotiations about the current turbulent climate, contract escalation clauses are useful to mitigate risk for both owners and bidders when prices are volatile.
While escalation clauses are typically used to account for the natural increase in prices over time, they can also be useful when prices fall.
“Escalation clauses can work both ways (upstream and downstream),” wrote Levelset’s Alex Benarroche. “So, there’s potential to include de-escalation provisions that will lower the price if the cost of materials drops. Those situations can really create a win-win and a fair allocation of risk.”
For suppliers like BMC, it can certainly be challenging when price drops undermine the value of an unfulfilled sale. How can suppliers incentivize buyers to follow through on a purchase after prices drop and there are cheaper alternatives elsewhere?
One way to mitigate risk is to shrink the window of time when a price swing could affect the purchase.
“Shortening the timeframe between the order and site delivery would help mitigate the risk of a big change in price,” said Matt Viator, construction attorney and senior Legal Associate at Levelset.
Delivering as close to the contract date as possible allows less time for prices to swing, and less reason for buyers remorse. BMC’s 90-day delivery provision should ordinarily hold up here, but lumber’s dramatic price collapse in the spring of 2021 simply moved too quickly.
“Suppliers can also use a more thorough contract or purchase order that provides additional recourse to the seller if the buyer reneges or breaches the contract,” continued Viator. “Granted, customers may consider buying from somewhere else.”
Unfortunately, price swings aren’t going anywhere. Since the price of lumber bottomed out last summer, it has since returned to near-highs of $1,410 per 1000 board feet – a 210% increase – after a number of wildfires and tariffs on Canadian imports put further strain on supply levels.
With prices so heavily inflated, it certainly seems plausible that another crash could happen. It’s important for construction professionals to prepare and ensure their contracts have provisions to mitigate risk in the event of rapid price fluctuations.