Materials Costs are Skyrocketing!

Materials costs are skyrocketing!

By: Kelly M. Davis

Kelly M. Davis & Associates is a full-service law firm involved in the general practice of law, providing cost-effective legal representation to individuals and business entities throughout Texas. Reach Kelly at: kelly@dallasconstructionlaw.com  (972) 434-8009 www.dallasconstructionlaw.com

The obvious resulting dilemma with a fixed price contract is whether the Builder must absorb these increased costs and cannot change the contract price. The projects could become entirely unprofitable in those situations. As a long time owner of a construction law firm, I have fielded many recent requests concerning what can be done with a fixed price construction contract when facing significant and unpredictable increases in costs. This seems to be yet another pandemic driven supply and demand issue.

 

Generally, the costs for lumber, steel and even concrete have risen anywhere from 200% to 800% depending on when it was purchased. This doesn’t even account for the products that are virtually impossible to get right now. So, at this point, the inflationary volatility of the market is well known, a Realtor should be aware on behalf of their client that many Builders are including clauses in their contracts that provide for escalation of materials costs.

 

Any Realtor showing and selling new construction should be aware of the escalation or force majeure clauses. Any Homebuyer now entering a fixed price contract should proceed with extreme caution as the certainty of the “fixed price” is no longer guaranteed.

 

As a Realtor, it would be a good practice for you to briefly review any presented contract to ensure there is not an escalation or force majeure clause. What does it say about increased costs for escalation of material? Some well-drafted contracts have specific provisions addressing this issue. 

 

Unfortunately, if a Builder must charge more to the Homebuyer on a fixed price contract based on escalation of materials cost, a Homebuyer will ultimately pay more then expected. This may not hurt the Builder ’s bottom-line, if it can pass along the increased costs to a Homebuyer, but of course this creates havoc to the Homebuyer’s budget, construction loan and/or appraisal. That’s why it’s best to enter into any fixed price contract with some sort of additional contingency.

 

As a Realtor, you are typically the first person that the buyer comes to if there is a problem. It should not be surprising that the Builder-Homeowner relationship may become uncomfortable or even adversarial if there is an unexpected price increase. It would be advantageous to know that if a price escalation necessitates the Builder to increase the contract price, the way to address this may be to look at how the budget is allocated. It is important for a Realtor not to engage in the unauthorized practice of law, however, there is certainly non-legal advice that may be offered to assist both your clients and their Builder in resolving any dispute. While neither side wants to scrimp on quality materials, perhaps other adjustments can be made within the original budget to accommodate the overages. This may not be ideal, but is as least one option to keep the project on track and maintain a good working relationship with the Homebuyer and their Builder. Clearly the escalating costs are a market condition not under the control of either party. If the Homebuyer terminates based on price escalation, they will not find it cheaper — unless it is a scam (watch out for those “good deals.”)

 

Escalating costs are not a completely new issue, but it certainly seems more problematic and widespread recently. If you are in a situation where your clients need help evaluating whether their contract has any provisions that may be helpful or to pre-mediate the dispute, it is best for you to refer your clients to an attorney specializing and construction real estate contracts.