Lumber and steel, drywall and insulation, new cars and rental cars, computer chips and bacon. What do these commodities all have in common? They are in short supply. And these shortages are impacting industries across the nation. Construction is feeling the pressure, as contractors face delays and customers grow impatient.

Since the start of the COVID-19 pandemic, manufacturing has been hard hit by factory shutdowns, border closings, and delivery slowdowns, and many businesses are still catching up. In addition, severe weather, including last year’s hurricanes and winter storms, forced many companies to decrease or stop production for various periods of time. More recently, worldwide flooding has damaged equipment and warehouses, blocked roads and railways, and wreaked further havoc on the global supply chain.
If that weren’t enough, a labor deficit is adding to the problem. Manufacturers are facing staffing scarcity, which affects production. And transportation companies are in desperate need of more truck drivers and delivery personnel.

Managing the Materials Shortage

No one is quite sure when the supply chain will return to normal operations, so until then, construction companies can benefit from incorporating these tactics.

Review your contracts: As we all battle the issues related to the materials shortage, checking contract provisions is a key strategy. For instance, do your current agreements include a price acceleration clause? If material prices increase after you have signed a contract, this clause will allow you to raise your price. A standard price acceleration provision will usually stipulate that if material costs increase by more than 5 percent, you can increase your price without the need for a change order. Just remember that you will need to provide the owner with documentation of that material price increase. If you are a subcontractor, a price acceleration clause is beneficial to you as well because it allows you to raise your price to the prime contractor as necessary.

You should also look for a material substitution provision. If a specified material is not just delayed but instead completely unavailable, this clause allows you to make a reasonable substitution.

Other important contract provisions relate to delays. Many delays, such as those caused by acts of God or extreme weather, are considered excusable and will allow you extensions. However, material delays may not be deemed excusable. That means, if your material deliveries are late, you will need to accelerate work to make up for the lost time. Those additional hours can be expensive, so if you can, add a material delay clause to your contracts, so you have the option for an extension.

Collaborate with your distributors: Suppliers are feeling the crunch, too, and they are making herculean efforts to provide materials to contractors. Take time to talk to your suppliers and explain your priorities. Get their advice regarding material trends and what shortage they believe will be long-term. If possible, work with them to build up your inventory of commonly used supplies, so you are ready for future projects. By partnering with your suppliers and treating them as trusted advisors, you will likely have more success in receiving the materials you require.

Keep detailed records: When you face delays and price increases during a project—and lack the contractual protection mentioned earlier—you may need to submit a change order. In that case, be sure to document all the communication between you and your client. If they do not respond to the change order request, send follow-up emails and describe your next course of action. This strategy is known as estoppel, a legal term that translates as “detrimental reliance.” In addition, retain evidence of all price increases, delays, and other issues. By creating this paper trail, you are protecting yourself against any legal claims.

Time-Honored Advice

No matter how many challenges your company is facing during the supply chain crisis, be sure you communicate clearly and often with your customers and your suppliers. By keeping everyone informed, you can manage client expectations and avoid any unpleasant surprises.

In addition, try to be as flexible, but also as prepared, as you can. The events of the past several months have shown us that the supply chain can be volatile and heavily impacted by world events. Make sure you review and understand every word of your contracts since the language of those documents will protect you from conflicts with your clients. But also find ways to problem-solve. Suggest alternative materials, and work with your suppliers to satisfy your project needs. If you can show that you are knowledgeable and nimble, you have a better chance of completing your projects and accommodating your customers.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.