In our last article, we discussed the general state of the regional construction economy and how that applies to specific industry vertical markets. We now turn to specific national macro-economic trends and discuss how these trends in turn impact the current regional construction economy. As part of this dialogue, we also discuss how these specific trends point towards specific contract and risk management issues that need to be front and center right now.
Supply Chain Disruptions and Their Legal Implications
The entire economy suffered extensive global supply chain disruptions during COVID. While we have seen some general improvements, we are still seeing significant intermittent supply chain disruptions and things have never fully returned to the pre-COVID clear supply chain conditions. The global supply chain continues to experience disruptions which can significantly impact construction timelines and budgets. Supply chain disruptions lead to construction delays and we are seeing regular disruptions in critical materials such as windows, doors, cabinets, and major equipment and appliance orders.
From a legal standpoint, it is crucial for contractors to continue to insist on appropriate contract terms to avoid liability for delays due to supply chain disruptions. Clauses regarding time extensions and cost adjustments should be crafted to address risk allocations among the parties for supply chain issues, ability to obtain extensions, and consideration of increased general conditions and other expenses associated with such delays.
The current, somewhat fragile, supply chain situation also makes the economy more vulnerable to supply chain shocks. While the full effects are currently uncertain, we can expect a major event like the recent the Baltimore bridge collapse may further destabilize various supply chains resulting in significant impacts to the construction sector. Such events underscore the importance of continuing to pay attention not just to time and money clauses, but also continuing to negotiate force majeure clauses in contracts to avoid responsibility for truly crippling supply chain impacts that cannot be predicted at the time of contract formation.
Inflation and Pricing Impacts
Inflation rates remained elevated above the typical inflation environment of the last couple of decades. This translates to potential increases in the cost of materials and labor during the project. This not only impacts overall project budgets but does raise the question of who bears the risk of price increases. Such inflation also raises the stakes for potential impacts from delay issues. Savvy parties needs to carefully consider project length and potential pricing impacts over time in negotiating construction agreements.
Interplay for Long Lead Time Items
Long lead time items present a situation of maximal exposure. Long lead time items, like significant HVAC and electrical equipment purchases, present supply chain and delivery risk issues and can seriously impact a project. Resulting impacts on time accelerate the risk associated with inflation and price impact issues. The more your project has significant, complex long lead time items, the more seriously you need to negotiate the price and time terms discussed above.
Managing Cost Escalation and Extension Language
Navigating the challenges posed by cost escalation requires careful attention to contract language. Terms that detail the conditions under which cost increases will be borne and by whom are essential. These terms not only protect against unforeseen expenses but also provide a framework for dispute resolution should disagreements arise over cost allocations.
The complex economic environment of 2024 demands a vigilant approach to risk management in construction contracts. Legal practitioners are indispensable in crafting agreements that anticipate and mitigate economic risks. Effective contract management ensures that projects remain viable and profitable despite the economic uncertainties that lie ahead.
Conclusion
The current environment presents a complicated posture of risk relating to time, supply chain issues, pricing instability, and increased inflation over the more recent baseline. All these factors connect together to present a need to focus on time, financial, escalation, and force majeure clauses. The current environment is better than that posed during COVID, but continued vigilance is definitely warranted.
In our next post, we will examine the second-order economic impacts on the construction industry, offering further insights into the strategic legal responses required to navigate these challenges successfully.
If you have questions about any DMV construction issues, please feel free to reach out Timothy Hughes at Bean, Kinney & Korman, P.C. at (703) 526-5582, thughes@beankinney.com. Our firm practices in Virginia, Maryland, and the District of Columbia in addition to various other jurisdictions.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.