construction briefings
TRANSCRIPT
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practical tight-knit briefngs including action guidelines on construction contract topics
ConstructionBriefngs
I. Rampant Construction MaterialPrice SpikesA. Causes o Steel Price EscalationB. Other Factors in Material PriceEscalation
II. The Impact o Price EscalationA. Delayed or Cancelled ProjectsB. Lack o Firm Price QuotesC. Reduced Numbers o BiddersD. Higher Project CostsE. Stolen Construction Materials
III. Historical Allocation oEscalation RisksA. Evolution o CommercialImpracticabilityB. Requirements o the Deense
IV. Tools or Mitigating and SharingEscalation RisksA. Bid Contingencies and ContractAllowancesB. Value Engineering or SubstituteMaterialsC. Early Material PurchasesD. Early Material Supply Commitments
E. Early Involvement o SpecialtyContractorsF. The Use o SurchargesG. Favorable Force Majeure ClausesH. Delay the Construction ProjectI. Flow Down the RisksJ. Bulk Material Purchases and SupplierPartnershipsK. Material Escalation ClausesL. Index-Based Escalation ClausesM. Cost-Based Escalation Provisions
V. ChecklistA. Practical TipsThe OwnersPerspectiveB. Practical TipsThe GeneralContractors or Construction ManagersPerspectiveC. Practical TipsThe Subcontractorsand Suppliers Perspective
VI. Reerences
The authors...
In brie... Material Price Escalation: Allocating
The RisksBy John Gallagher and Frank Riggs
Th pcdtd calati matial pic i th c-
tcti idty v th lat th ya ha cad iicat
acial hadhip ppad ppli, bctact,
ctact, ad w. W d tatitical mmay thctact l d, pjct dlayd, i dipt
lti m th t ctcti idty play t
mitiat, hit cp th acial cqc thi dd
ad damatic matial calati. Yt, it i ctai that pt hav
b lt, latihip hav b damad, pjct hav b
impactd, ad ctcti lawy hav b calld p t lk
way t t hit th impact matial calati thi
ppad ctcti clit. I thi aticl, w viw m
th taditial lal mchaim ad l law acti th
allcati matial pic calati ik. I additi, w t
t m th additial tl bi tilizd i th idty id t mitiat matial pic calati ik. Fially, w ha
m thht matial pic calati cla i ctcti
ctactwhat i bi d i th pblic ad pivat ct,
m dic i calati cla tct, ad m -
ti hw w, ctact, bctact, ad ppli
miht appach calati cla.1
I. Rampant Construction Material Price Spikes
A mb ctcti pdct hav damatic pic
ica i ach th lat w ya.2 Th pic tl ad
50% t 60% i th t hal 2004 al, at ya ith fat
alli pic. Althh th tl pic lvld i 2005, tl
matial pic w th i aai ali thi ya. Di th
pid m Mach 2004 t Mach 2005, th Pdc Pic
Idx hihway ad tt ctcti 12.7%. Aphalt
ad bick, which wt p i pic hly 4% p ya m 2003
thh 2005, ddly pikd by 38% btw At 2005
John Gallagher and Frank Riggs are
partners in the Construction Practice Group
at the Atlanta ofce o Troutman Sanders.
40405252 NO . 20 06 12 DECEMBER 2006 2006 THOMSON/WEST
December 2006
Thi s r eproduct i on has been made wi t h t he permi ss i on of t he publ i sher ofConstruction Briefings, Thomson/ West , 610 Opper man Dr i ve, Eagan, MN55123. Fur t her r epr oduct i on wi t hout t he per mi ssi on of t he publ i sher i spr ohi bi t ed.
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Construction BriefngsThi pblicati wa catd t pvid y with accat adathitativ imati cci th bjct matt cvd;hwv, thi pblicati wa t caily ppad by plicd t pactic law i a paticla jidicti. Th pblih it ad i di lal th pial advic ad thipblicati i t a btitt th advic a atty. I y qilal th xpt advic, y hld k th vic a cmpttatty th pial.
ConsTruCTIon BrIeFIngs (Issn 0162-3176) i id mthly, 13tim a ya with tw i i Jaay; pblihd ad cpyihtd 2005
by Thm/Wt 601 oppma Div, P.o. Bx 64526 st. Pal,Mn 55164-0526 a http://www.wt. thm.cm a Th bciptii $867.00. F bcipti imati: call (800) 2219428, witWt, Cdit odi Pci 620 oppma Div, P.o. Bx64833 st. Pal, Mn 55164-9753 a Pidical Pta Paid at st. Pal,Mn a Ptmat: sd add cha t Ctcti Bi 610 oppma Div P.o. Bx 64526 st. Pal, Mn 55164-0526.
generAL PHoToCoPY noTICe: rpdcti, ta i a tivalytm, tamii thi pblicati ay pti it i aym by ay ma, lctic, mchaical, phtcpyi, xaphy,acmil, cdi, thwi, witht witt pmii iphibitd. F athizati t phtcpy, pla ctact th CpyihtClaac Ct at 222 rwd Div, Dav, MA 01923, usA(978) 7508400; ax (978) 6468600 Wt Cpyiht svic at 610oppma Div, eaa, Mn 55123, ax (651) 6877551. Pla tli thpcic matial ivlvd, th mb cpi y wih t ditibtad th pp mat th .
ad At 2006. Th PPI idx bick ad
tctal clay til climbd m a 3% ica
i 2004 t a ica 9.5% i 2005. gypm
pdct pic hly 20% p ya i 2004,
th by a lik amt i 2005, ad th aai i
th 12 mth thh At 2006. Al, dill, a imptat pdct i th ctcti
idty, i pic by 54% i 2002, 13% i
2003, 38% i 2004, 46% i 2005, ad 26.6% m
At 2005 t At 2006.3 Th tatitic a
ihti, ad th pic ica hav b
dd, xtm ad xpctd.4
A. Primary Causes o Recent
Material Escalation
Th a may ca th ct matial
pic piki i th ctcti idty. Thy
ivlv bth dmtic ad itatial makt
c, a wll a apct th ctcti
idty that mak it paticlaly cptibl t
abv-ava ct ica.5
Th ct, damatic calati ctc-
ti matial pbably ba i lat 2003 ad i
th t qat 2004 with damatic cha
i th tl maktplac. Pi t lat 2003, tl
pic had b th bjct ly mdt ifa-
ti v th lat 20 ya. I th atmath
th 2001 ci i thi cty, th ctc-
ti idty, ad paticlaly th matial
pic cmpt that idty, xpicd
littl i ay ifati. I th calda ya mDcmb 2000 thh Dcmb 2001,
th Pdc Pic Idx (PPI) ctcti
matial ad cmpt, a pblihd by
th u.s. Ba Lab statitic, hwd
cha, ad th vall PPI ihd d
actally ll 1.6%, whil th Cm Pic
Idx (CPI) at ly 1.6%. Di 2002 ad
2003, th ifati pict maid aly th
am.6 By aly 2004, th tl maktplac
chad adically, ad th impact vbatd
thh th ctcti idty.7
Causes o Steel Price Escalation
Th ca th kyckti tl pic i
aly 2004 icldd th llwi:
Growing World Demand for Steel
Th lat dcad ha damatic cmic
ad ctcti bm i th pat thwld, paticlaly i Aia, ad pcially i Chi-
a, Idia, sth Ka, ad Japa. Chia i pd-
i billi dlla ach ya ctcti
pjct i bildi w citi, bcmi m
idtializd, ad impvi it iatct.
Chia i pdi appximatly $25 billi t
ppa th 2008 smm olympic al.
Ctcti th Th g Dam, which
will b th lat vlm cct dam i th
wld, i xpctd t ct $25 billi, ad wh
cmplt will ctai 14.86 milli cbic mt
cct. Caal bi bilt t cay wat
m Chia lat iv t liv wat
hta i th Chia i a xpctd
t ct $58 billi. Thi sth-t-nth Wat
Divi Pjct i th lat wat divi
pjct all tim.8 Di 2005, Chia cmd
appximatly 25% th wld tl pply.
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Chia al cmd, i 2005, appximatly
40% th wld cmt pply.9 Th lit
iicat ctcti pjct dway i
Aia ad .
I a vy ht pid, Chia wt m bi
a la xpt ad th aw matial t
bi th wld lat impt .10 Th
ya a, ad i l tha tw mth, cap
i pic icad 300% i th itatial
maktplac, a Chia ad th cti ap-
pad t b willi t pay whatv pic th
makt wld ba i d t l Aia c-
tcti pjct d. Th pic tl bam
ad clm tl damatically a u.s. mill
had t pay m ad m th l ad l
availabl tl cap.
Consolidation of Production Facilities
A cd act that ctibtd t th pc-
dtd calati tl pic ad t th ma-
tial pic pik wa th act that th pdcti
capacity dmtic pdc had, v tim,
adjtd t tay v with, bt t ahad , makt
dmad.11 I th tl plat makt, th u.s. had
a clidati -cap-bad pdcti
aciliti i th pi dcad. siicat xpai that capacity, i th ac viht matial
pic pik, wa laly impibl.
Reduced Coke Availability
Th dcd availability mid ck, d
with tl cap i th pdcti tl plat
al impactd th tl pic pik ad ht-
a. A l-lati btaa i th ly
dmtic mtallical ck mi wa ill-timd
ad addd t th tl pic p.12
Diversion of Material Orders for Federal
Emergencies
Th dal vmt divi dm-
tic tl d i city applicati
i Iaq ad th lcati al playd a l i
pic calati, pcially tl pic calati.
Th xci mcy athity by th
u.s. Dpatmt D cad m thdlay i dmtic tl pdcti.13
B. Other Factors in Material
Price Escalation
sm th makt c idtid abval playd havc with th pic th c-tcti matial. I additi t th act,hwv, th llwi cicmtac actd,ad may cti t act, th pic dmticctcti matial.
High Energy and Transportation Costs
F cctiv ya, dil l pic
hav icad damatically. F xampl, b-tw May 2005 ad May 2006, dil lpic appximatly 40%. sch picica pt at ad dict p thct i qipmt ad dlivi c-tcti matial. I additi, icad cdil pic talat it hih ct mt p-tlm-bad pdct. F xampl, btwMay 2005 ad May 2006, ptlm-badplatic ctcti pdct icad i picby 18%, ad aphalt pavi pic icad
30%. I additi, a may dmtic ihav b witchi v t liht cd adth pdcti lw-l dil l, thqatiti availabl aphalta by-pdct ith y pcha dcad.14
Residential Construction Demands
Th ht idtial ctcti makt i thuitd stat ha addd t th p thpply id ctcti matial.15 sm th mt damatic pic ica hav ccd
with lmb ad plywd, matial impactd byth dmad th hi makt. Lmb pic- icad a ava 25.8% i 2004, whilplywd pic a ava 21.5%.16
Natural Disaster Impacts
Hica Katia, Iva, rita, ad th at-al diat v th lat w ya ctibtd,
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at lat i th ht tm, t bth th pply id
ad dmad id p.17 Plyviylchlid
pic hav i damatically th cc-
tiv ya, ad icad 20% btw At
2005 ad 2006.18 spt hta llwd th
hica latd htdw i 2005, a ipdcd m il w tmpaily avail-
abl th maact PVC ad th
viyl pdct. Dama m hica al
impactd th taptati t ctc-
ti matial.19
II. The Impact o Price Escalation
Th impact th ctcti idty
th ct, pcdtd pic calati hab mlti-ld. Ctaily, ci hav cm m
th ctact ad bctact cmmity
dd limiatdpt mai, a wll
a iicat pjct l. o la pjct,
tw pmit tctal tl abicati cm-
pai lt th battl with tl pic calati
ad dclad bakptcy.20 I additi t lt
, ad damad dtyd ctcti
bi, th ippl ct thi damatic
pic calati ha icldd m th
impact.
A. Delayed or Cancelled Projects
I th wld pivat dvlpmt, matial
pic calati ha b iicat h t
ca may dvlp t thik th m-
b cay t mak a pivat dvlpmt
wthwhil. Dlayd pjct, dcd-i-cp
pjct, caclld pjct hav b th -
lt. Th am impact i bi lt i th pblic
ctcti ct.
F pblic pjct that mt b dd by
bd i, iicat pjct pic ica
pt pcial pblm. I a mb pj-
ct, btw th tim a bd wa appvd by
th vt ad th tim bid w civd
ctcti pjct, matial pic icad
iicatly ad bid cam i at pic mch
byd th appvd ctact amt. Pblic
bdi a th acd with th altativ
ptti pjct hld whil pplmtal
di i ht, cacli th pjct i ad-
ditial my i t availabl, attmpti t
cal-dw th pjct cp.21
F xampl, i octb 2006, cial at th
Bl Plai Advacd Watwat Tatmt
Plat i Wahit, D.C., w cd t hlv
pla t bild th wld lat itallati
-hapd dit i liht damatic pic
ica. Th D.C. Wat ad sw Athity
civd ly a il bid th pjct, ad that
$306.7 milli dlla bid wa almt 64% v
th w bdt timat. Th ttal pjct
ha calatd i ct m a iial bdt $148 milli i 2000, t a vid bdt $350
i 2006, ad w t a timatd $600 milli
bdt i 2007.22 Th Flida Dpatmt
Taptati ha dd a lat $1 billi
hihway ctcti v th xt th ya
d t hih ct aphalt, cct, tl, ad
athwk.23
B. Lack o Firm Price Quotes
I th pat, al ctact w abl t
hld bctact ad ppli t thi qt
60, 90, phap 120 day. Tday, with
th bctact ad ppli wh wk
i paticlaly itiv t matial pic cala-
ti, it i icaily diclt t t a m qt
ay iicat pid tim. spaki abt
th vlatility i th cpp pdct maktplac,
Mak shti, Vic Pidt raydc Cp.,
a idtial ad cmmcial lctical ctac-
t i rcht, nw Yk, cmmtd: ovd a qti pic that a d ly
a matt h.24 I p t th Ctc-
ti Fiacial Maamt Aciati 2006
ctcti idty aal acial vy,
m tha 80% th pdi al ctac-
t ad bctact ptd dca i th
dati bid pic aat.25
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C. Reduced Numbers o Bidders
I pat bca th ct lvl activ-
ity i th ctcti idty, bt al i pat
bca calati a, w a di
w bidd thi pjct. stat whaphalt ppli hav b impactd a i
w bidd hihway ad pavi pjct.26
ow a i m bidd pjct
ad a vall dcti i th mb bid-
d pjct.27
D. Higher Project Costs
Th pjct that hav t b cappd
iicatly dlayd a a lt pic cala-
ti diiclti hav qtly xpicdhih pjct ct. Ctact ad ppli
a adi pttial, t pic calati,
ad th abc pic calati cla i
mt ctcti ctact, t lad t hih
ctact pic ad la pjct ct.
E. Stolen Construction Materials
I J 2006, a Bkly, nw Yk c-
md a hitic wah. Th wa cad
by a vaat wh wa tippi cpp wi tll a cap.28 Cpp ha bcm valabl
that ctact a lctat t t cpp ma-
tial a jb it a that it will b tl.
With cpp pic at hitic hih, th ct
byi placmt cpp pdct at th d
th pjct ca b xpiv. Mchaical ad
lctical ytm a paticlaly impactd by
ii cpp pic. 29
III. Historical Allocation oEscalation Risks
Althh th cqc ad da
ampat matial pic calati a may ad
cmplicatd, ctcti idty mmb a
t witht tl ad pti i mitiati
hai th ct ad chdl impact mat-
ial pic calati. Iitially, w will cid
blw th xtt, i ay, t which taditial
ctcti ctact ad l-tablihd lalpicipl may b aitac t ctact,bctact, ppli, ad w acimatial pic calati da.
ealy ctactal ik allcati wa ctlldby yildi picipl that ba with tictbvac th actity ctact tm-pd ly by impibility i th ablt
th wd. Impibility a a xc pmac i a acit lal ccpt, ta-ditially limitd i applicati lly t thitac wh pmac had b dd
actally impibl d t pvi ca.Th, th m pibility pmac, matt hw liht, ha ld t impibilitya a xc l cad by Act gd, act vmt, th alt th th paty.30
Th c maj cla, ccivd ctia ad cmmly d i tday typical c-tcti ctact, i th ctactal xpi thi impibility ccpt.
Th hitical appach t ik allcati dt icad cost pmac ha mpha-izd tict cmt th bt thbaai. Fdd i th rma lal maxim
pacta sunt servanda,31 pati m acit timhav b bd t th xp tm thibaai. Thi appach d it xpi ich aly elih dcii a Pardine v. Jane.32
Adpti th tac ablt liability cditial pmi mad by pati t actact, th ct ad wh th paty byhi w ctact cat a dty cha p
himl, h i bd t mak it d, i h may,twithtadi ay accidt by ivitabl -city, bca h miht hav pvidd aait
it by hi ctact.33
o w spm Ct i a aly cadd th cmpti ccpt actalimpibility ad actity ctact i th c-tcti aa.34 I i t pvid li t
a ctact wh pmac wa ddm diclt a a lt ttlmt d tlatt dct i th il, citi Paradine th
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Ct ld:
That cvat [cmplti th bild-i] it wa hi dty t lll, ad h wabd t d whatv wa cay t itpmac. Aait th hadhip thca h miht hav add by a pviit th ctact. nt havi d , it i ti th pw thi ct t liv him.H did t mak that pat th bildit ad ccpati. It cld tb ccpid with th aty t th liv th imat. It i a wll-ttld l law that i a paty by hi ctact chahiml with a bliati pibl t bpmd, h mt mak it d, lit pmac i dd impibl byth act gd, th law th th paty.u diclti, hwv at, willt xc him.35
A. Evolution o Commercial
Impracticability
Md Amica jipdc, tmpd
by cmmcial aliti, ha mvd byd th
qimt ablt impibility ad ha
cizd that li may b availabl d
ctai cicmtac wh phibitiv ct
ha dd a dtaki cmmcially
impacticabl.36 It hld b td that i may,
i t mt th pply ad ctcti ca
i which a paty k li d t cmmcialimpacticability, th paty al ht li -
d th clly latd dcti tati
pp37 ad mtal mitak38 act, a
wll a c maj.39 Bad p it xplicit
mphai ica th ct pmac,
th ath limit thi viw t cidati
cmmcial impacticability applicati. Th
ccpt cmmcial impacticability ha b
cdid i th uim Cmmcial Cd 2-
615. Whil ctcti ctact a pimaily
vic ctact (a ppd t mly matial
pply ctact) ad t ally cidd
t b withi th ambit th u.C.C.,40 i dcidi
u.C.C. ca dali with cmmcial impactica-
bility, th ct i mt ca xply cid
bth u.C.C. 2-615 ad rtatmt Ctact
(scd) 261. Thi hldi a th ap-
plicabl t ctcti ca, ally. scti
261 th rtatmt Ctact (scd)
titld Dicha by spvi Impactica-bility, t th th cmm law applicati.41That cti tat that
[w]h at a ctact i mad, a paty
pmac i mad impacticabl with-t hi alt by th ccc a vtth -ccc which wa a baicampti which th ctact wamad, hi dty t d that pmaci dichad, l th laa thcicmtac idicat th ctay.
Th impacticability ccpt i t a pci tatic , bt ath pt th v-hit-
i li, daw by ct hplly pivt cmmcial pactic ad m, i whichth cmmity itt i havi ctact
cd accdi t thi tm i twihdby th cmmcial l qii p-
mac.42 Whth pmac paticlactact wld b cmmcially impacticabl ia qti act.43
F ctact ki li d t dva-tati matial pic ica, cmmt d t
rtatmt scti 261, cidd i ilati,pvid camt. It ad:
Pmac may b impacticabl b-
ca xtm ad aabl diclty,xp, ijy, l t th pa-ti will b ivlvd. A v hta aw matial ppli d t wa,mba, lcal cp ail, htdw maj c pply, th lik, which ith ca a makdica i ct pvt pmacaltth may bi th ca withi thl tatd i thi scti.A m chai th d diclty xp dt ch ca a icad wa, pic aw matial, ct ctcti,l wll byd th mal a, dt amt t impacticability ic it ithi t ik that a xd-pic ctacti itdd t cv.44
Cmmt 4 th u.C.C. 2-615 imilaly tat:
a v hta aw matial ppli d t a cticy ch a wa,mba, lcal cp ail, htdw maj c pply thlik, which ith ca a makd icai ct altth pvt th ll
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m ci ppli cay t hipmac i withi th ctmplati thi cti.
A viw th applicati by th ct th
picipal cmmcial impacticability i th
aa pply ad ctcti ctact whth ctact wa acd with iicat pic
ica d t makt vlatility i, hwv,
bi.45
B. Requirements o the Deense
T pvail a d cmmcial impac-
ticability, a paty mt hw (i) a pvi
vt, ith a act gd a act a thid
paty, mad pmac impacticabl, (ii) th
-ccc th vt wa a baic amp-ti p which th ctact wa bad; (iii) th
ccc th vt wa t th paty alt;
ad (iv) th paty did t am th ik th
vt ccc.46 Th -alt qimt
i mly a qitabl thhld ad, i th ca
pic ica cad by makt vlatility,
hld p hdl t th ctact ki
li l th ctact ca b hw t hav
b lit i th chdli hi matial
pcha, dlayd th jb, thwi hav
ctibtd t th pic impact xpicd. Mt
ca a dcidd th bai th th th
qimt.
Impracticability o Perormance
Th it p th impacticability d-
qi bth a pvi vt (
that cc at xcti th ctact) ad
impacticability pmac. Impactica-
bility ha tw mai cilal impibility
ad xtm ct.47 Ct imly qi a
hwi objective, ath tha m subjective
impibility. F itac, i ca i which th
ctact i abl t pm d t th ail
it ppli hi w iability t btai ma-
tial, it mt th pv that th c-
tact cld pvid pmac bca th
qid matial w abltly availabl
withi th bdai a aabl aa p-
mac.48 Bth atal diat49 ad maktvt50 may cat ch bjctiv impibilitya will jtiy li. gally, hwv, cthav b m lit i ati li i ca
ivlvi atal diat tha th cad bymakt vmtal impact.51
Icad ct, a idicatd by rtatmt 261, cmmt d, mt b a ct which i wll
byd th mal a. o ladi Bitihca aii t th 1967 sz cii ad thicad ct t hippi it catd tatd thatpmac mt b m tha mly
xpiv. It mt b pitivly jt t hldth pati bd.52
A itctiv (bt lly) ca i which thctact cclly btaid li d t
btatial ica i matial ct wa thALCOA ca b t th il cii th1970.53 ALCoA td it a l-tm ctactwith ex ex t pply ALCoA with
almia which ALCoA wld th mlt itmlt almim t t t ex thpci. Th ctact ctaid a cmplicatdcalati mla that wa tid t th Whlal
Pic Idx-Idtial Cmmditi (WPI) ad
t ava hly lab at paid by ALCoA atit plat. Dvlpmt th calati mlawa th pdct mch ach, icldipaticipati by Ala gpa. ALCoA al
wa t achiv a tabl t icm abt 4ct p pd almim cvtd. exht a l-tm pply at a avabl pic.Th calati mla wa ttd xtivly
i pat data t that it wld yild thcct lt.
F a mb ya th mla wkda plad. utatly, bii i 1973,
th pik i y ct tid by oPeCacti, i cct with aticipatd plltictl ct, atly icad ALCoA yct. ey wa th picipal -lab ct
act i almim pdcti. Hih yct atly dittd th mla impact,thby yildi pic ica wll blw
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ALCoA icad ct. ALCoA claimd that
it wld l i xc $75 milli v th
maii tm th ctact. It ht li
ai, am th thi, mtal mitak
act ad cmmcial impacticability. Th ct
ad bth ct. It dtmid that th-ccc a xtm dviati th
WPI-IC ad ALCoA -lab pdcti ct
wa a baic [mtal] ampti which th
ctact wa mad ad that ALCoA ith a-
md b th ik th dviati byd
th abl limit ik.54 It al d th
ablt amt ad ppti l ALCoA
wld d th maii tm th
ctact t b v h t waat li,
ditiihi th ca th d m
ali ca dyi li icad ct
d t makt c.55 I liht it di
th itt th pati, th ct md th
ctact by implmti a w pici mla
that wld yild lt m i li with th
pati xpctati th maii tm
th ctact.
utatly bqt ctact
ki t ly pALCOA, th ct did t
pvid ay maabl d diticti
btw th l cad by makt pic vla-tility which will b dmd cit t mit
li m th t wll byd th mal
a. Bth p- ad pt-ALCOA ca -
t that th paty ki li i qid t
pv xtm l.56 Th icc imply
tp btatial ica d t d
th ctact cmmcially l.57 F x-
ampl, i Jalaprathan Cement Company, Ltd.,58 a
cmt cmpay wa awadd a pply ctact
a ttal xd-pic. Th ctact ctaid
pic calati cla. D i la pat
t btatial, xpctd ica i ctai
matial ct ad tp il cii latd l
ica, th ctact td t ic a ttal
l appachi a thid th iial ctact
pic. Th ctact d t cti pply-
i cmt d th ctact. Th vmt
tmiatd th ctact ca ad btaid
th qid qatiti m ath c at a
btatially icad ct. Th bad amdth tmiati ad atd th vmt it
icad -pcmt ct, dtmiich a pic vaiac t b withi th a i
which pvi ct had did li.59 evxtm ica a hih a 400% i dictct cmpt th ctact, i th abc
a pic calati cla, hav b d tb icit t mit li.60
Lack o Foreseeability/Assumption
o Risk
It i th hwi lack ability ma-
datd by th qimt abv that may p
th att hdl ctact ki lid t th impact makt vlatility thimatial ct. Th ct hav vwhlmily
jctd claim li d t pic calati th bai ability ad ampti th ik. Th t-citd ai Jd P
i th NIPSCO ca i typical th cfati th tw ccpt i th ca xd-pic
ctact.61 I NIPSCO, th tility ht libad p it c maj cla, cmmcial
impacticability, ad tati, ai that a
xpctd vmt li had dd itl-tm pcha ctact cal ptabl
d t ica i cal ct. Th ct jctdach th claim bad i la pat p th
dal d ability ad ampti th ik, ad ccldd that th mal [hc
abl] ik a xd-pic ctact i thatth makt pic will cha ad a xd pic
ctact i a xplicit aimt th ik makt pic ica t th ll ad th ik makt pic dca t th by62
Th al icliati th ct t dthat th vy at a xd pic ctact c-
titt a implid ampti th malik makt vlatility al p a iicat
impdimt t li. ev wh damatic ma-kt ica a th lt wld-wid cii,
th vy tity ch vt may dthm abl i th y th ct. I
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th eat Aili ca th 1970, th ct
dtmid that th cd wa plt with
vidc a t th vlatility th Middl eat
itati ad it cla impact th il makt
at th tim th ctact wa xctd.63 Th ct
wt th, tati that v i th abc ch vidc i th cd, it wld b jtid
i taki jdicial tic th ca ch
vlatility, di thm th abl ad
t ctitt ik amd by gl.64
giv th hihly pblicizd at tday
vlatil ctcti matial makt, c-
clly ai that th -ccc
v xtm, apid ica i th pic
m matial i a baic ampti p
which th ctact wa bad p a chall bth matial ppli ad ctact. A
ca ivlvi th ct tl cii pv
thi pit.65 I Chainworks, Wbc accptd a
pcha d t pply Chaiwk it cal-
da ya tl tbi qimt bad p
xd it pici. D t th damatic i i
th makt pic tl i aly 2004, Wbc
ilatally impd it matial pic ica
p Chaiwk. Chaiwk wa cd t
pay th icad pic thh th d th
ya a a cditi Wbc hi it pplycmmitmt. It lat dcd it lat paymt
t Wbc by th aat th xta cha.
Wbc d th balac, claimi, am
th thi, that it wa titld t pa th
pic ica bca makt c-
diti dd it pmac impacticabl
d th iial ctact.66 Th ct, bad
p p la m tl ppli id
bii i Dcmb 2003 (th am mth
th pcha d id) dcibi ct
vlatility i th tl makt, a pct tmi th makt, th impiti cha, tc.,
d that th pati kw that th tl makt
wa vlatil ad that a ica i aw matial
ct wa abl.67
A ctd i th pvi cti thi
Aticl, th ca ad maitd th ct
ac th bad ica i baic ctcti
matial a wll kw via ctact xpi-
c ad idty pblicati. Whil th pic
ctai matial may mdat v tim, a a
whl thy a t likly t abat aytim .
P that th ccc iicat pic
calati wa a baic ampti th ctactd th cicmtac will b challi.
Additially, iv th act that i bildi
ctcti ctact a ppd t pply
ctact, idividal matial cmpt
pt ly dict apct a bad
ctact, v th xtm pic ica -
cd ali a likly t pdc acial
cqc v a t atiy th qi-
mt that thy d th ctact cmmcially
l. Th ath t that all pati i
th ctcti idty wld b btt vd
t pactivly add th ik ad hw thy
hld b had ath tha ly p a ct
at th act dtmiati wh th v-
hiti li will all.
IV. Tools or Mitigating and Sharing
Escalation Risks
ev i taditial ctact cla ad qi-
tabl picipl law a t likly t pvid -li t ctact, bctact, ad ppli
acd with xd-pic ctact ad iicat
matial pic calati, th ctact cmm-
ity i t witht th pti i dali with
matial pic calati ik. I apppiat
ca, m th llwi may b -
l tl w, ctact, bctact,
ad ppli.
A. Bid Contingencies and ContractAllowances
Taditially, ctact, bctact,
ad ppli hav mplyd ctici i
thi bid a a hd aait may ctcti
pjct ik. Abt a pic calati cla i
th ctact, m th mthd hai
calati ik with th w th i th
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chai ctact pivity, hidd bid cti-
ci may cti t b mplyd. Th ik,
c, m ch bid ctici i twld:
1. I viw th damatic pic pik
v th lat th ya, will th bidcticy b adqat?
2. I th bid cticy i iiicat
h t pvid adqat ptcti,
will it lt i a bid pic t hih t b
accptd by th w?
Ath, phap btt, appach may b
th tablihmt a calati allwac
li itm i th ctact. sch a allwac
cla diat th matial pic ica
which th allwac ca b d, ad pvidaad idtiyi th iial bid pic
ad actal pic paid matial. Th a
may vaiati th tct ad pati
ch a cticy cla. Th allwac
amt miht v a a pp limit t th
ctact ability t cp aticipatd pic
calati ct, th ctact miht titl th
ctact t qt ad civ a cha d
lai a allwac itm. Th advata
ch a allwac cla, th w, ad i
th cla i tablihd a th maximm ct
ica availabl t th ctact, i th ability
th w t bdt pic calati ad
th ctaity that th calati will t xcd
a tablihd amt.
B. Value Engineering or Substitute
Materials
Th hih ct cpp ha cd m w-
ad ctact t ach altativ ma-
tial. Althh tail tl pipi ad PeX
(c-likd plythyl) a pibl cpp
pdct btitt, th matial al a p-
tlm-bad pdct ad bjct t calati
p thi w. Th i talk i th id-
ty almim wi maki a cmback a a
cpp btitt, bt may matial btitt
pt i thi w, icldi th ik
that th ctact bctact will t hav
iicat xpic with a btitt matialad th lai cv w matial almay add t th ct.68
C. Early Material Purchases
Whv pibl, calati ik ca bmiimizd by th aly pcha matialbjct t iicat calati. o c, ch
aly pchai pactic qi aly cpditi i th di dcmt. I additi,ct ta ad iac (ad phap,
dbl hadli) mt b actd it ay ct-bt aalyi.
D. Early Material Supply Commitments
eMCor gp, Ic. nwalk, Cctict,
th ati lat lctical ad mchaicalctact, ha appachd pic calati ikwith a ivativ tl: la pjct, eM-Cor will t by th cpp b th w
lct a ctact; i eMCor i t lctd a abctact, thy will imply pply th cpp th pjct.69 I d mt ctact t
lck i a matial pply pic, thy mt hav a
aly ctact cmmitmt m th w. Fmth w ppctiv, thi ma ht bid
valati pid ad qick ti-plliwith pct t th al ctact awad.
E. Early Involvement o SpecialtyContractors
I d t accmplih th val i-i aly pply pic lck-i bjctivmtid abv, w mt t pcialty
ctact (.., tl, cct, mchaical, adlctical) bctact ivlvd aly i thpjct. Havi pcialty ctact paticipat
i th vlti th pjct di will allwthm t pvid ipt pic-avi ma,t a ali ap th cp th wk,
ad ivlv ky ppli aly i th pic-t-ti dici. F xampl, tl abicatmit tl pici laly, ad th aly
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ivlvmt a tl abicat with th di
ad ctcti tam ca lad t hlpl cm-mdati adi th pici ctai tlmmb, tl mmb availability, ad th
ct-avi tati.70
F. The Use o Surcharges
Ctact pvii pvidi cha
l ct alady a i i m matialpply ctact ad i ctcti ctact.
Althh typically limitd t l-ly cala-ti, pvii ch cha i ctctictact d attmpt t add apct
matial pic calati acti th idty.
G. Favorable Force Majeure Clauses
Althh mt c maj cla a t
citly libal t accmmdat th impact matial pic calati, th badi a c maj cla may b ai t ti-
at tha th icli a w pic calaticla. Libalizd c maj cla may, at
a miimm, pvid a ctact bctac-t with a tim xti i th ac matialhta pchai dlay cad by adical
pic ica. A m avabl c majcla miht al pvid a ctact bc-
tact with titlmt t a qitabl ctactadjtmt (.., tim ad my) acct th cqc pic calati. A pitd
t ali i thi aticl, hwv, mt cmaj cla ctmplat ctact lily aticipatd abl
cicmtac.71 I tday ctcti wld,ad abt m mdicati t th tadad
c maj cla, it may b diiclt t
dmtat that matial pic calati waabl.
H. Delay the Construction Project
Althh ttim impactical, ad alwayiky, ath pibl tactic dali with
pcdtd matial pic calati i thdcii t dlay th pjct ad hp a
m avabl matial pic vimt
dw th ad.
I. Flow Down the Risks
Taditially, al ctact hav daltwith may ctcti ik by fwi thm
dw t t allwi thm t b pad p
mbctact ad ppli. Cally
catd xd-pic bctact ad pcha
d that phibit bctact ad ppli
m hai calati ik with th ctac-
t w till a cmmplac. Hwv, -
lik may ik that bctact ad ppli
taditially hav accptd a pat thi pliht,
matial calati ik m t hav pawd
wd bctact ad ppli cadi ctact tiati, althh tatitical
vidc thi i pa. Th 2006 Ctcti
Idty Aal Fiacial svy pd by
th Ctcti Fiacial Maa Acia-
ti pdcd th lt, bad admittdly
a limitd ampli ctact, bctact
ad ppli:
Fity-ix pct th pdi
bctact idicatd that thy
w icld calati cla i thictact. sixty-th pct th -
pdi al ctact al tatd
that thy icldd calati cla i
thi ctact.
Twty-v pct th pdi
bctact idicatd that calati
ct w a bi tatd a a allw-
ac itm i thi bctact.
Twty-tw pct th pdibctact idicatd that thy add
l cha t thi pici aa-
mt.
nit pct th pdi
bctact idicatd that thi b-
ctact a chad a a lt
calati ik.
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o th da attmpti t c p-
pli ad bctact t ba all th ik
matial calati i th pibl dalt
a bctact ppli aci a m
matial pic ica. Th, i thi i th ap-
pach t matial calati tak by a w al ctact, p-qalicati th b-
ctact ad ppli acial tth,
th pmac bd, bth, bcm
m iicat cidati.
J. Bulk Material Purchases and
Supplier Partnerships
Althh t apppiat i all cicmtac,
whv pibl, a hd aait matial
pic calati may b achivd by byi ma-tial i blk, pcially i th matial ca b
tilizd m tha pjct. sch blk
pcha may lt i btt matial pic,
althh ta, hadli, ad iac ct
al mt b tak it acct. Blk pcha
may b pat a pc by which a ctact
bctact k t tablih a cl wki
latihip with pd ppli. I a p-
pli kw that a ctact bctact
ca aat pat bi with th ppli,
ad a cit vlm bi, th bttpici tm a pibl.
K. Material Escalation Clauses
With icai qcy, th ctcti
idty i mplyi matial pic calati
cla i th t t ctl, ad ha th ik
, vlatil matial pic. Th tct ad p-
ati th matial calati cla vay
atly. sm calati cla attmpt t tack
th actal mvmt matial pic m thbid amt t th a-dlivd pic. sm a
did t fct thtical pic mvmt
bad vai idty ct idx. oth
fct vaiati th tw appach t
mai pic vlatility.
I th paaaph that llw, m th
m cmm, ad cmm, pic adjt-
mt cla a dcibd. T ait th ad i
dvii a calati cla, w hav icldd
cmmt th ctal at m
th m ppla pic adjtmt pvii.
I additi, w ti i that
hld b cidd i mplyi ay picadjtmt cla.
The AGC Approach
I th ac th damatic tl pic cala-
ti i lat 2003 ad aly 2004, th Bad
Dict th Aciatd gal Ctact
Amica (AgC) adptd a lti i Mach
2004 that calld th icli qitabl
adjtmt cla matial pic ica
i xd-pic ctact bi lt by pblic ad
pivat w. I May 2004, th AgC C-
tact Dcmt Cmmitt mvd qickly t
dvlp a ppd, tadadizd amdmt
t th AgC xd-pic w/ctact a-
mt. Thi ppd ctact amdmt (AgC
Dcmt n. 200.1, Amdmt n. 1, P-
ttially Tim ad Pic-Impactd Matial.)
wa did t tablih Bali Pic
matial idtid by th pati a pttially
tim ad pic-impactd, ad t pvid amthd adjti th ctact pic a a lt
fctati i th bali pic. Th ky
at th AgC pic adjtmt pvii
a wth ti:
Pic Ica ad Dca. Th
cla allw pwad ad dw-
wad pic adjtmt.
spciid Matial oly. Th cla
qi that th pati pciicallyidtiy th matial which may b
bjct t adjtmt.
Bali Pic. Th cla madat th
pati amt a bali pic
ach matial diati, a wll a
a pici adjtmt mthd ach
matial caty.
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n Dalt ecalati Ma. Th
cla ctmplat that th pati
may a a matial pic ct idx
appach t calati, bt th adjt-
mt mthd i lt t th pati, with
dalt mthd pvidd.
Ctact Adddm. Th amdmt i
itdd t b xctd ctmpa-
ly with th xcti th iial
ctcti ctact.
ntic. Th cla titl ith paty t
tiy th th a bai a pic adjt-
mt, ad pvid that th tic hld
b pvidd withi 30 day m th dat
th bai a pic adjtmt ai.
sppti Dcmtati. Th -
qti paty mt pvid apppi-
at dcmtati btatiati ach
pic adjtmt qtd.
n Mak-up. Pic adjtmt cat
icld ay vhad pt mak-p.
n rtactiv Adjtmt. n p-
wad dwwad pic adjtmt
i apppiat with pct t matialdlivd b th dat th qid
ticati.
Maximm Limit. Th cla mak
pvii amt a maximm
limit (by pcta th iial c-
tact pic) th aat ica
dca i bali pic.
Tim exti. Th cla al pvid
th pibility a tim xti
d t dlivy dlay, matial -availability, i byd th ctl , ad
witht th alt , th ctact, it
bctact matial ppli.
It i diclt t dtmi th xtt t which
th AgC Dcmt n. 200.1 i actally i
i ctcti ctact. Ctaily, th cla
fct a lical appach t matial cala-
ti, ad it m likly that th AgC appach
ha b itctiv i th cati th
pic calati pvii i pblic ad pivatctact. oth ppla tadadizd idty
ctact (i.., th ctact m pblihd by
th AIA ad DBIA) hav t icldd calatipvii i thi tadad amt pb-lihd m. similaly, althh w diti
th tadadizd idty m pblihd by
th Amica Ititt Achitct (AIA) adth ei Jit Ctact Dcmt Cm-
mitt (eJCDC) a d t b pblihd i 2007,
plimiay dat th AIA dcmt d tctai a matial calati cla.
The Federal Governments Approach
Th Fdal vmt ha a l hitytha th pivat ct with pic calati p-
vii. sch cla hav b cmm i may
pblic wk ctact ptlm-latdpdct, icldi aphalt, m pid
tim. Pic calati pvii w a pmit-
td by th Fdal Acqiiti rlati (th
F.A.r.) i all xd-pic amt, wh thvmt Ctacti oc dtmi,
di th p-licitati ta, that th
a calati cla i apppiat.72
Th F.A.r. tablih th Ctacti ociht t pvid, i xd-pic ctact, pic
adjtmt cla th al typ.73 I
d t icld pic adjtmt cla ixd-pic ctact, th Ctacti oc, i
th p-licitati pha, mt dtmi that:
(i) Th i i dbt cci th
tability makt lab cditi
that will xit di a xtdd p-
id ctact pmac, ad
(ii) Ctici that wld thwi
b icldd i th ctact pic ca b
idtid ad cvd paatly i thctact.74
nmally, pic adjtmt allwd by
th F.A.r. a tictd t th which a a
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cqc idty-wid ctici
ad t ctici byd th Ctact
ctl.75 Th F.A.r. pvid tadad ec-
mic Pic Adjtmt cla with
adjtmt bad actal ct76 ad
adjtmt bad tablihd pic.77 Thtatty cla may b mdid by icai
th aat 10% limit ica, bt th-
wi th qid cla mt b btatially
th am a th tatty cla.78 Th F.A.r.
allw, bt d t pvid a qid -
td cla , pic adjtmt bad
ct idx.
Th tial at th F.A.r. ecmic
Pic AdjtmtLab ad Matial cla
bad fctati i th actal ct labad matial a a llw:
Pic Ica ad Dca. Th cla
pvid bth lab ad matial
ica dca.
ntic rqimt. Th ctact
mt tiy th vmt withi 60
day at ay ch ica dca,
ad t lat tha th dat al pay-
mt.
sppti Data. Th tic mt i-
cld th ppd pic adjtmt a
wll a ppti data xplaii th
ca, ctiv dat, ad amt th
ica dca.
uit Pic Matial oly. With pct
t matial calati, th cla i
limitd t th matial which
th a it pic tablihd i th
ctact.
exmpti F Dlayd Dlivi. n
pwad adjtmt i allwd mati-
al vic qid t b dlivd
pmd b th ctiv dat th
adjtmt, l th ctact ail
t dliv pm accdi t th
ctact chdl i a xcabl dlay.79
Miimm ecalati Thhld. n
adjtmt i allwd i th t cha
wld b l tha 3% th th-c-
t ttal ctact pic.80
Maximm Limit. Th aat allica cat xcd 10% th
iial matial it pic, l th
10% limitati ha b mdid i th
ctact.
Limitl Pic Dca. Th i
pcta limitati th amt
dca that ca b mad d th
pic adjtmt cla.
Adit riht. Th vmt tai th
iht t xami th bk ad cd th ctact th ya at th
dat al paymt.81
Th D Fdal Acqiiti rlati
spplmt (DFArs) al icld tadad
cla i addi pic adjtmt
tl, almim, ba, bz, cpp mill
pdct (DFArs 252.216-7000) ad -ta-
dad tl itm (DFArs 252.216-7001).
Public Contract Clauses
oth pblic bdi, icldi tat ad m-
icipal w, hav b l p t adpt
pic adjtmt cla i thi ctcti
ctact. I additi t th l-hld ti that
ctact a i th bt piti t aticipat,
ad am th ik , matial pic calati
i thi pblic ctact bid, pblic w al
hav diclty mayi pic adjtmt cla
with p-dtmid bdt limit. Hwv,
th i pcdt , ad m hity with,pic calati cla i pblic ctact.
F xampl, hihway ctact hav b
th idty mt hit had by ca-
lati matial pic. Th ct liqid aphalt
pavi, cmt, l, tl, ad th matial
vital t hihway ctcti pjct hav
kycktd i th lat th ya. I additi
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t hih y ct, pic calati i th
taptati idty al ha b ld by
clidati i th hihway idty (.., a
dcti i th mb pim ctact,
qay whip clidati, tc.), by la
taptati ctcti pam, by thdwizi th ctcti wkc a a
lt th itability taptati di
pi t At 2005, ad by lcalizd matial
hta82 m ctcti pdct.83
I th stat Wahit, xampl, th
Wahit stat Dpatmt Taptati
ctcti ct idx icad 31% i th t
tw qat 2006 a cmpad t th aal
ava 2005. Ht mix aphalt ct al
33% i th t tw qat 2006, accdit th Wahit DoT ct cd.84 T pt
thi i ppctiv, cid that th ava
aal wth at th Wahit DoT
ctcti ct idx m 1990 thh 2001
wa appximatly 1.5% p ya; ic 2001, th
ava wth at ha b 12% p ya. simi-
laly, th pic tl ba d i Wahit
DoT taptati pjct icad by m
tha 100% btw Jaay 2002 ad octb
2004.85 Th ctcti ct idx maitaid by
th Fdal Hihway Admiitati (FHWA),althh cmpd lihtly dit matial
ad dit c, hw a imila piki
hihway-latd matial pic i ct ya.
Th Amica rad & Taptati Bild
Aciati pt that, ic 1998 ad thh
2005, th ct matial hihway ad tt
ctact icad 35.1%, a cmpad t a
19.8% ica i th cm pic idx.
A a lt, th u.s. Dpatmt Tap-
tati Fdal Hihway Admiitati, ad
tat DoT ac th cty, hav dtak
a mb ma t hlp allviat th pb-
lm cad by thi pcdtd calati,
icldi th cati vai pic adjtmt
mchaim hihway ctact. Th Fdal
Hihway Admiitati th u.s. Dpatmt
Taptati id a tchical adviy
ti pcd th dvlpmt ad
pic adjtmt cla i hihway c-
tact.86 May tat DoT hav implmtd pic
calati ma, althh th appach
tak by th tat DoT vay i itti way.
Bca th appach may b t c-
tact, ppli, w, ad thi cl ith cati pic calati cla, w will
dcib m th cmpt tw th
pic calati appach.
The Virginia DOT
I lat 2004, th Viiia Dpatmt Ta-
ptati implmtd a pcial mthly pic
adjtmt mchaim tl d pcic
itm idtid wk. Th VDoT pvii
pll t, i at dtail, th mla t b ap-plid i dtmii ctact liibility a
tl pic ica dca.87 Itti a-
pct thi tl calati pvii icld:
ealy stl od. T b liibl a
pic adjtmt, th ctact, b-
ctact ad/ ppli a qid
t plac a pcha d liibl
tl itm withi 30 day at xc-
ti th VDoT ctact.
spcic Idticati eliibl Mati-
al. oc hippd t th abicat, th
tl itm a qid t b pcically
td, labld, tad, cizabl
by cl maki ad idtiabl by
pjct ipcti ad adit vica-
ti.
P Bid Pic. Withi 15 day at
th ctact awad, th ctact i -
qid t bmit matial pic qt,bid pap, th dcmtati
atiacty t VDoT th bid itm
which a tl pic adjtmt may
b qtd.
Ava Pic Dcmtati. Th
pt-awad dcmtati bmittd
by th ctact mt b adqat t
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cmplt a VDoT m tablihi th
ava pic p pd th liibl
tl bid itm.
Cticati Bid Imati. Th
ctact mt ctiy that all p-pti dcmtati i iial adwa actally d i cmpti th bidamt liibl tl itm.
Matial Pic ecalati oly. n cala-ti i allwd tl abicati, hip-pi, ta, hadli, cti.
Miimm ad Maximm ecalatiLimit. A liibl tl pic ica dca mt b i xc 10%,
p t a maximm 60%, m thtablihd ba pic, wh cmpadwith th latt pblihd pic idx ict wh th matial i hippd tth abicat.
Diti Ctlli Pic Idx.Th pic calati pvii pcith Ba Lab statitic PdcPic Idx t b d ach caty tl matial, qii a ava tw idx with pct t ctai tlmatial.
excldd Dlay Dama. Althhdlay d t tl hta may jtiya ctact tim xti, thy will tb d claim tadby qip-mt, xtdd c vhad, thct aciatd with ch dlay.
The Florida DOT
Th Flida DoT tak a mwhat ditappach t matial pic calati. Th Flidahihway pcicati pvid pibl piccalati with pct t l ad bitmimatial d i hihway ctcti pjct.ui th bitmi matial calati p-vii i th Flida hihway pcicati aa xampl, cid th llwi ittiat thi pic calati mchaim:
Miimm Ctact Timam. ecala-
ti iht attach ly t ctact hav-
i a iial ctact timam
m tha ya, m tha 5,000
t aphalt cct.
Pic Ica Dca. Th cala-
ti pvii tak it acct bth
ica ad dca i pic.
Idx-Bad Pic Adjtmt. Th
pic adjtmt a bad vaia-
ti m th Aphalt Pic Idx (API)
bitmi matial. Th Flida
DoT dtmi th API ach mth
by avai qtati i ct th
t day th mth at all tmial
that cld aably b xpctd t
ih bitmi matial t pjct
i th tat Flida.
Mthly Adjtmt Dtmiati.
Th Flida DoT cmpa, a mth-
ly bai, th ct API with th API
pvaili i th mth wh bid w
civd, ad allw pic adjtmt
wh th ct API vai by m
tha 5% th API th mth wh
bid w civd.
Madaty Adjtmt. Th API-bad
pic adjtmt i madatyth
ctact i t iv th pti
accpti jcti th adjtmt,
ad ctact tic i qid t
iitiat th pic adjtmt.88
F ppli, ctact, ad w i
ach ivativ appach t matial pic
calati pvii, th vai calati
pvii mplyd by th tat dpatmt
taptati a wthy cidati. Thu.s. Dpatmt Taptati Fdal Hih-
way Admiitati wbit89 pvid d
imati matial pic calati act-
i hihway ctcti, a wll a m vy
l lik t th tatmt matial pic
calati by vai tat DoT.
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L. Index-Based Escalation Clauses
May th calati cla bi c-
td i th maktplac a pmid ma-
abl cha i ctcti ct idx
vai ctcti pdct. Th liac ctcti idx i dmd pabl
by may w ccd abt thi ability
t dtmi ad t viy actal pic ica
which a w hld ha m p-
ibility. nt ly d ct-bad idx imp
additial admiitativ ad adit cti
ctcti w, bt th mai a halthy
lvl kpticim am w with pct t
th pttial maiplati ctcti ct
by ctact, bctact, ad ppli.
National Construction Price Indexes
Ctact, bctact, ad ppli
qtly pp ctact calati pvii
bad p vai atial pic idx. F
xampl, th uitd stat Dpatmt Lab,
Ba Lab mthly pblicati titld
Whlal Pic ad Pic Idx, pvid
mthly pic imati vitally all c-
tcti matial ad ppli.
sic 1986, th Ba Lab statitic
(BLs) ha b pblihi idx that ma
cha i th pic matial ipt t th
ctcti idty. Withi th Pdc Pic
Idx (PPI) amily idx, th a val
maj claicati ytm, ach with it w
hity, , ad tct.90 Th PPI idx will
t icld ay ct th by ic byd
th pdc ladi dck th pit
al xampl, it will t icld iac,
iht, ta, abicati, itallati ct.Th i PPI ctcti lab, ad th
PPI tcki ad iac a t pcic
h t idicat th pcializd vic ad
pdct d i ctcti. All th PPI i-
dx a bad p pic at a atial lvl.
A a lt, thy may acct ial lcal
pic dic.91
sic 1995, th BLs ha ptd PPI tim i
data, w la, ad tchical matial at
it wbit (www.bl.v/ppi). Th PPI wbit
pmit t dwlad aly all ct
ad dictid PPI tim i data.92 Th PPI
la a id typically i th cd thid
wk ach mth. sm PPI data i a-
ably adjtd t limiat th ct cha
that mally cc at abt th am tim ad
i abt th am maitd ach ya. Hwv,
it i th adjtd vi PPI data that
a th pimay cmpt pic calati
cla. Ad, th adjtd PPI data i tily
bjct t vii ly c, mth at
it iial pblicati, t fct lat pt ad
ccti by cmpay pdt.93
Th AgC Chi ecmit, K sim,
athd a AgC Ctcti Ifati Alt
i sptmb 2006, ad thi pblicati p-
vid a walth imati adi th
hity, at, ad ct idx acti
th ctcti idty. M. sim al i-
cld i thi Alt a liti th Pdc Pic
Idx which a blivd t b th clt ap-
pximati t itm actally d bht
ctcti. A M. sim pit t, m
th PPI pblihd by th BLs ad th c-
tai a wid a matial tha th pci-
cally d i ctcti pjct. F xampl,
th PPI tl mill pdct (diatd
a WPu1017) al icld tl d i mt
vhicl, appliac, qipmt ad lwh,
i additi t tl d i ctcti. o th
th had, th BLs PPI cct pdct
(diatd a WPu133) icld matial d
lly i th ctcti idty. Th lt b lad h: b mplyi a matial
pic calati cla bad a pblihd pic
idx, mak ctai that y dtad th
pdct, ad th pici imati, icldd
i a paticla PPI, ad that th ch idx i
th mt apppiat mai th cala-
ti which i th c y ctact cla.
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ENR Cost Indexes
Ath qtly-d c pici
imati calati cla i th amily
idx pblihd by eii nw-rcd
(enr), a ctcti idty pblicati th Mcgaw-Hill Cmpai. enr pblih
bth a Ctcti Ct Idx (CCI), a wll a
a Bildi Ct Idx (BCI), ad bth a d
widly thht th ctcti idty.
Th enr pic idx a bad ima-
ti athd by pic pt cvi 20
diatd u.s. citi.94 Bth th CCI ad th BCI
idx hav a lab cmpt. I th cd
wkly i ach mth, enr pblih th
CCI, BCI, matial idx, killd lab idx
ad a cmm lab idx th 20 lctdciti, a wll a a atial ava bad th
20-city pici imati. Th t enr i
di ach mth ctai a idx viw
th atial idx th latt 14-mth p-
id. Di ach th wkly i enr
ach mth, m dtaild idx imati i
pvidd th vai cati ctc-
ti matial.95
Th enr pic a bad pic qt
m diatd ppli i ach city, a wlla m lcal i wa at. Th idx d
t ma ct ditial btw citi;
thy ma ly th td i a idividal city
ad i th u.s. a a whl. Th idx a t
aably adjtd ad, enr pblih 20-city
ava i a idx which it cmmd a a
m apppiat ma ct calati.96
Th a th pblih ctcti--
latd ct idx, ad, a pvily mtid,
m pivat ad pblic w (.., vai
tat DoT) hav catd, ad ly xclivly
, thi w matial ct idx. Ky t th
ccl applicati a idx-bad cala-
ti cla i th pati ll appciati
th apppiat th paticla idx
a paticla ctcti cmmdity, a ll -
dtadi th ma i which th idx-
bad pvii pat, ad cal dati i
d t claly implmt th pati calati
xpctati.
Th pati ail t ccl achiv thth al i vidt i may ca. F xampl,
iJohn T. Oxley, et al. v. Oklahoma Gas and Electric
Co., et al., 97 th oklahma Ct Appal, wa
acd with a ctact calati pvii whichwa pmid th aa pic atal a
a tablihd, m tim t tim, by th FdalPw Cmmii. utatly, di th
tm th pati ctact, C catdth Dpatmt ey ad th Fdal e-
y rlaty Cmmii, ad th FdalPw Cmmii cad t xit. Th ct
jctd th by amt that, wh thtity tablihi th pic idx cad t x-
it, th ll iht t calati al cad.Itad, th ct ctd th ctact t iv
ct t th mtal itti th pati, adth d that thi mtal itti wa
th pidic calati atal a al picbad th i aa makt at, v i th
Fdal Pw Cmmii wa l avail-abl t tablih that at. I th ca, ct
hav tld with zzy ctact diti th xact mlaic pati idx-bad
calati cla.98
I xpic, patia mtim vy lppy i thi appach
t matial pic calati cla, pciallyth bad pic idx. rlyi a ct
t d th pati itti with pct tth pati a calati pvii i t a
diabl lt.99
M. Cost-Based Escalation Provisions
Bca a idx-bad calati cla maylt i a thtical matial pic ica
dca that ba latihip t th actalct xpic th ppli, bctact,
ad ctact a paticla pjct, ctact-i pati mtim pt a ct-bad
calati aamt. sm ct-bad claa imply tatd100 ad littl m tha libal-
izd c maj cla, lavi iicatdtail th implmtati th cla t b
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wkd t by th pati dd by a ct
abitati pal. oth a dtaild, lavi
littl aid, bt mtim alami i thi
lth ad cmplxity. Th a ct-bad
calati cla al i mtim th pdct
amiliaity with, ditt , th vaimatial ct idx ppd by m
th ctacti pati. I ay vt, ad al-
thh a ct-bad calati pvii al ha
diadvata,101 m dici ct-bad
calati aamt i apppiat.
I a w itd t tiliz a actal ct-
bad calati pvii, it i td that
th aamt icld at lat th llwi
tial pic:
Adqat dcmtati (.., ppliqt ad dtaild bid bakdw)
tablihi th ba pic th ap-
plicati th calati pvii.
Dcmtati (.., additial p-
pli qt) tablihi that th ba
pic i, i act, a aabl pic.
A ctactal bliati that th c-
tact ad bctact immdiatly
(withi a pcid timam at c-tact awad) plac d ay mat-
ial itm bjct t calati.
Ctact laa xcldi m th
calati cla pati ay pic -
calati aciatd with lack dilic
by th ctact, bctact, p-
pli, with th dlivy th matial
at th chdld dlivy dat.
sw cticati by th ctact
th accacy , ad actal liac ,th matial pic i th bid, ad th
accacy ctact ptati
adi th actal matial ct.
Pmpt tic qimt.
excli vhad ad pt mak-
p th pic calati.
Adqat aac that th ctac-
t pic d t icld a hidd
calati cticy.
A ytm idtiyi, ad tack-
i thh th abicati dlivypha, th pcic matial bjct tcalati tm.
Ctaily, a w cld mply a mb th pti i tcti a ct-bad -
calati pvii (.., a maximm calati
limit, a tw-way cla pati, tc.), bt th
cmpt idtid abv a damtal
at, m th w ppctiv, ayactal ct-bad calati pvii.
Th xtt t which pblic ad pivat w- will mply matial pic calati cla
i ctcti ctact i ctai. Ctaily,
it cat b xpctd that pic calati
cla will b adptd a a tadad l-tm
plicy all ctcti pjct. Mt pblicaci mplyi calati pvii c-
ti t pidically mit th tility ch
cla, a wll a th impact th cla
th pblic pcktbk. still, acd with dcli-
i mb bidd m pjct ad
hih bid pic, with th lti that ptpd caclld pblic impvmt,
pic calati cla cti t b mplyd
by may pblic aci ad t b cidd
by th.
V. Checklist o Practice Pointers
Di th lat ix mth, th ctcti
idty ha m ai matial pic
calati with ctai ctcti matial.Th ct lwdw i th idtial hi
makt, a wll a icad impt ad la
dmtic capacity, may a m calati
p. Cct pic hav lvld t, ad
lmb ad plywd pic hav xpicd
a adal dcli di 2006. still, l picmai hih ad will likly cti t d . A
a lt, aphalt pic a likly t mai hih.
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0
Cpp al i likly t mai at a lvatd
pic lvl. stl ad cct ct a had
t pdict.
T ait th ctcti idty xctiv
th lal pactiti i dali with th c-
qc matial pic calati i thi -
ctai t, w th llwi chcklit
pactical tip. W hav bdividd th chcklit
i d t ti m th ppc-
tiv th w, ctact/CM, bctact
ad ppli.
A. Practical TipsThe Owners
Perspective
I y mply a matial pic cala-ti cla, pvid that th cla will
ti bth pwad ad dwwad
adjtmt.
Cid a calati cla which
pvid a miimm lvl calati,
blw which th ctact will am
all ik, a wll a a maximm limit
allwabl calati.
Ath vaiati t th mplymt
limit calati ad calaticla i th ik hai
pviii.., th ctact ad
w ach ha a ctai pcta
ay liibl calati, phap
a lidi cal.
I i a calati cla bad
actal pic ica v bid amt,
i that th ctact i qid
t ih adqat p th pic
lid i th bid, ad p (..,mltipl qt) that th pic i th
bid a aabl ad citt with
makt pic.
Cid th pttial advata
a di-bild ctact aamt,
wh di ad bild cl-
labat aly dcii which may
act matial chic ad dlivy
chdl.
Ivlv pcialty ctact (.., tl,
lctical, mchaical, ad cct
bctact ad ppli) i thaly ta th pjct dvlp-
mt, that y ca bt m thi
idac adi matial pic ad
hta.
I y itd t hav th ctact ad
bctact am all th ik
matial pic calati, p-qaliy
ctact ad bctact th -
acial tth cay t withtad
matial pic pik whil ctiit pm.
I y itd t hav th ctact ad
bctact am all th ik
matial pic calati, cid
th pibl tilizati pmac
bd.
A y ctmplat qii ctac-
t ad bctact t am all
matial pic calati ik, cid
th pibility that y pjct ctwill b hih, a a cti hidd
ctici, bd pmim, ad
pttial pjct dlay dipt.
I y tiliz a matial ct calati
cla, ad it i idx-bad, mak c-
tai that y lly dtad th at
ad lvac th pcid idx, a
wll a th mchaic th ma i
which th idx will b mplyd.
I y pic calati mchaim
ivlv a cmpai bid pic t
actal pic, icld adqat adit
iht i y ctact.
I y mply a pic calati cla,
limit it pati a t xcld th
impact calati lati t ay
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dlayd ctact di matial dlayd pmac wk.
Cid limiati matial piccalati cla i ctact ht
dati, wh th i a at likli-hd that th ctact, bctact,ad ppli ca lck-i aticipat
matial pic.
A calati cla miht cid th a calati dad zi..,th t w mth th pjct pid
a calati , ic th ctacthld hav b abl t pic th wkad aticipat calati at lat tht w mth th pjct.
I y pvid th pibility atim xti a a lt matialhta xtadiay pic hik,xcld th iht t ay ctact bctact cvy th dlay
dama (.., tad-by qipmt,xtdd hm c vhad, tc.)
B. Practical TipsThe General
Contractors or ConstructionManagers Perspective
I y bctact ppli i-it matial ct calati cla
i thi ctact, i that y havpa-thh iht t th wadthat th pic calati mchaim iy bctact ad i y ctactwith th w a idtical.
P-qaliy y bctact ad
ppli thi acial ability twithtad likly matial pic pikdi th c a pjct.
Attmpt t t th w amtt allw y t p-pcha, ad tpaid , matial which ca b ddaly ad which may b paticlalycptibl t calati.
I y a abl t icld a malmatial pic calati cla i yctact with th w, attmpt t
mdiy th c maj cla t allw tim (at lat) ad my aciatd
with matial pic calati.
edcat th w th ct adva-
ta paatly idtiyi, adpvidi th pibility cala-ti paymt , matial which havb xtmly vlatil i pic. (Thii paticlaly imptat a dalvmt pjct, wh a ctact-
i c p-bid dcii t acalati cla i cay; bt it al
hld b a imptat apct yaly ctact tiati with pivatw.)
Wk with th w t val it achiv pjct ct avi, by lk-i btitt matial which at a vlatil i pic, by achi
th cmi which will tpibl matial pic calati adhlp ptct th w bdt.
Cid th pibility blk matialpcha, m tha pjct,ad tablihi ppli pathipwhich may lad t btt pici adt ppli cmmitmt t ypjct.
Cid th tility mplyictact allwac matial piccalati, that th w ca pl axd calati mb it th iial
pjct bdt.
I y a pic calati cla withy bctact ad th w, a allwac itm matial piccalati, i that th mthd
pcid dmtati th piccalati a idtical p ad dwth chai ctact pivity. I pibl,
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tct th bctact ad y
ctact with th w t pvid a
il dtmiati ay titlmt
t pic calati, ad t hav that d-
tmiati bidi th w ad
y bctact.
I y aticipat a amt with th
w adi matial pic cala-
ti, qi that y bctact
ad ppli paatly pic th
matial which will b bjct t th
calati cla.
B way w qimt that
y pvid a gMP aly i th di
dvlpmt pc, l that gMPcmmitmt al icld ma
matial pic calati.
C. Practical TipsThe Subcontractors
and Suppliers Perspective
edcat th ctact ad w th
advata matial pic calati
pviid it aly.
Qaliy y ppal t iit a
mtally-aabl matial pic -
calati cla.
Attmpt t cvic th ctact ad
w th val havi y i-
vlvd i th di dvlpmt ta
ad i ay val ii t.
B way bid qimt that y
hld p pic lthy pid
tim.
B way bctact cla (..,
pay-i-paid cla) that limit y
cvy matial pic calati
t ly th amt, i ay, which th
ctact ca btai m th w.
udtad th vai pic idx
availabl mai matial pic
calati, ad i that y ch
th pp idx y matial.
exami th c maj cla p-
pd y bctact ad attmpt
t tiat th iht t tim (at lat)ad my a a cqc mat-
ial hta xtadiay matial
pic hik.
I y a allwd t mak aly d
matial, i that y bctact
pcha d cv th ct t-
a, dbl hadli, ad iac.
VI. Reerences1. Much has been written in recent years on the subject o materialshortages and material price escalation. We draw liberally on the
eorts o those who have spoken beore us. The materials cited in
this article should provide a valuable resource or those who look or
better ways to deal with the ongoing risks posed by material price
escalation.
. Consider the ollowing construction material price spikes, as mea-
sured by the United States Bureau o Labor Statistics, rom June
o 2005 through June o 2006: asphalt (71.4% increase), gypsum
products (23.3% increase), copper and brass mill shapes (81.5%
increase), aluminum mill shapes (17.1% increase), crude petro-
leum (25.7% increase), cement (14.4% increase), iron ore (17.4%
increase), iron and steel scrap (73.7% increase), copper base scrap
(86.1% increase), plastic construction products (19.2% increase),pre-stress concrete products (18% increase), ready-mixed concrete
(13% increase), and diesel uel (33% increase). These construction
material price increases, which began to spike in early 2004, ar
exceed the broad measures o price ination reected in the Bureau
o Labor Statistics Consumer Price Index or all urban consumers
(CPI-U) or the Producer Price Index (PPI) or fnished goods.
. AGCs Construction Ination Alert dated September 2006, reported
by AGC Chie Economist Ken Simonson.
. Id.
. Id. Ken Simonson, the AGCs Chie Economist, oers the ollowing
two characteristics o the construction industry as contributing to the
severity o the escalation impacts: (a) Construction contractors typi-
cally are contractually locked into contracts requiring fxed quantities
o materials. When supplies become scarce, or more expensive as
a result o domestic and international market orces, a contractor
cannot simply build a smaller building or use less material to build
a roadway. In other industries, the impact o material shortages are
dramatic price increases will be sotened by, or example, reductions
in product output; (b) Construction project costs also are particularly
aected by transportation costs and transportation difculties. On a
construction project, large quantities o materials must be delivered to
a specifc site, requently rom great distances. Also, as oil prices rise,
and uel costs increase, the construction industry eels a signifcant
impact. For example, in 2004, the market demand worldwide or dry
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bulk ocean carriers used to carry scrap iron, copper ore and other
commodities tripled the cost o the ship charters bringing cement
into the United States, and port and rail yard congestion added to
the increased costs and resulting delays.
. Ken Simonson, Sticker Shock Will Stick Around, in the AGCs
Georgia Construction Today, Third Quarter 2006.
. In their article published or the American Bar Association Construc-
tion Forum at its Winter 2006 program, Brad Gordon and David Ratter-
man oer an excellent recap o the lead-up to the steel shortages and
price spikes in 2004. Prior to 2004, the domestic producers o steel
in the United States were, or the most part, meeting the demands
o the domestic marketplace. With the advent o electric arc urnace
technology in the 1970s and 1980s, domestic steel producers were
turning the large inventory o steel scrap available in the U.S. into
new steel or construction. Steel was being sold to the construction
industry on the basis o cost based pricing (i.e., as opposed to having
the market demand set the price, the steel mills were basing steel
prices on the actual cost o production and a fxed mark-up). Thus,
prices or milled steel products were set, not at the time the order
was placed, but as the steel completed, or neared the completion
o, the milling process. This pricing policy let bidding subcontractors
and contractors at some risk as they prepared their estimates and
made contract commitments or steel prices in advance o having
fxed prices rom the steel mills. Still, the long history o stable steel
prices rom the mills allowed contractors to successully negotiate
this pricing risk. At least, that was the case prior to late 2003 and
early 2004.
. S. Lewis, Biggest In The World, 2005 Engineering News-Record
Sourcebook, p. 42, 43-45, December 2005.
. P. van der Schans, Increasing Material Prices Gouge Construction
Industry, Construction Executive, January 2005.
10. Steel Price Set To Carry On Climbing,The Financial Times(London),
p. 28, January 27, 2004.
11. B. Gordon and D. Ratterman, Price Escalation, Deaults, PotentialDeaults, and Remedies, American Bar Association Construction
Forum Winter 2006 Program.
1. See, e.g., Steel Makers Biggest WorryChina,The Deal, December
10, 2003; This Is Not Your Fathers Steel Bubble, Fortune, p. 53,
January 26, 2004; B. Gordon and D. Ratterman, Price Escalation,
Deaults, Potential Deaults, and Remedies, American Bar Associa-
tion Construction Forum Winter 2006 Program.
1. B. Gordon and D. Ratterman, Price Escalation, Deaults, Potential
Deaults, and Remedies, American Bar Association Construction
Forum Winter 2006 Program.
1. Ination Maintains Strong Momentum, Engineering News-Record,
p. 66, June 26, 2006.
1. Although the housing market seems to have cooled recently, many
economists have been predicting a decline in housing construction
or the last our years; and in each year, the housing industry set
new high water marks. Some economists still doubt any signifcant,
long-term decline in residential construction. See Will Construc-
tion In The U.S. and Georgia Thrive or Dive In The Rest o 2005?,
Presentation o Ken Simonson, Chie Economist or the Associated
General Contractors o America, April 19, 2005.
1. P. van der Schans, Increasing Material Prices Gouge Construction
Industry, Construction Executive, p. 26-29 (January 2005).
1. Damage caused by hurricanes in the Gul o Mexico disrupted sup-
plies o ethylene and natural gas dur ing the second hal o 2005. In
the atermath o Hurricane Katrina, repair eorts along the Gul Coast
quickly consumed many building materials, creating at least short-
term shortages and urther price hikes. Big Home Centers Inuence
Sways The Broader Materials Market, Engineering News-Record, p.
29, March 20, 2006.
1. U.S. Department o Labor Bureau o Labor Statistics, Producer Price
Index.
1. Third Year O Price Hikes Fueled By Hurricane-Related Disruptions,
Engineering News-Record, p. 31, September 25, 2006.
0. Big Steel Fabricator Is Latest To Bet On Chapter 11: Financially
Troubled Havens Steel Seeks Relie, But Stockholders Could Still
Loss Out, Engineering News-Record, May 24, 2004; For Fabricator,
Steel Price Hike Helped Turn Out The Lights: Interstate Iron Works
Liquidation Puts Big New York Job In Limbo, Engineering News-
Record, p. 26, March 21, 2005.
1. P. van der Schans, Increasing Material Prices Gouge Construction
Industry, Construction Executive, p. 26-29 January 2005.
. Extreme Price Hikes Shelve D.C. Wastewater Digester Project,
Engineering News-Record, p. 7, October 16, 2006.
. Will High Paving Costs Put Recycled Roads Back In The Fast Lane,
Engineering News-Record, p. 70, June 26, 2006.
. Prices Jump Forty Percent Over A Year Ago, Engineering News-
Record, p. 31, March 20, 2006.
. CFMAs Financial Survey Hot Topic: Material Shortages & Price
Escalations, CFMAs Building Profts, p. 52-55, September-October
2006.
. Price Escalation Is Stuck In High Gear, Engineering News-Record,
p. 69, June 26, 2006.
. Cross-Cutting Management Issues, published by the Washington
State Department o Transportation Construction Ofce, December
31, 2005.
. Speculation Sparks Huge Price Surge Hitting Electrical And Mechani-
cal Costs, Engineering News-Record, p. 64, June 26, 2006.
. For example, a transormer that costs $65,000 a year ago may now
cost nearly $100,000, Speculation Sparks Huge Price Surge Hitting
Electrical And Mechanical Costs, Engineering News-Record, p. 64,
June 26, 2006 (comment by Ben Capland, Vice President o Logistics
or Turner Construction Co., New York City).
0. P. Bruner, Force Majeure: World-Wide Excuse or Contractual Non-
Perormance, 2002; see also Burner & OConnor On Construction
Law (2002).
1. Translates as contracts must be honored.
. 82 Eng. Rep. 897 (1647).
. Id.
. Dermott v. Jones, 69 U.S. 1, 2, 17 L. Ed. 762, 1864 WL 6582
(1864).
. Id. At 7.
. Possibly the earliest case in this regard is Mineral Park Land Co. v.
Howard, 172 Cal. 289, 156 P. 458 (1916) wherein the court provided
a contractor relie rom his obligation to supply gravel reasoning that
where a great unanticipated cost renders perormance impracticable,
it is or purposes o the law impossible.
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. Restatement (Second) o Contracts 265 (1981).
. Restatement (Second) o Contracts 294 (1981).
. For a scholarly comparison o the nature o orce majeure and com-
mercial impracticability, see P.J.M. Declercq, Modern Analysis o the
Legal Eect o Force Majeure Clauses in Situations o Commercial
Impracticability, 15 J.L. & Com. 213 (Fall 1995).
0. Compare Bonebrake v. Cox, 499 F.2d 951, 960, 14 U.C.C. Rep.
Serv. 1318 (8th Cir. 1974) and Schenectady Steel Co., Inc. v. Bruno
Trimpoli General Const. Co., Inc., 43 A.D.2d 234, 350 N.Y.S.2d 920,
13 U.C.C. Rep. Serv. 993 (3d Dept 1974), order a d, 34 N.Y.2d 939,
359 N.Y.S.2d 560, 316 N.E.2d 875 (1974) with U.S. ex rel. Bartec
Industries, Inc. v. United Pacifc Co., 976 F.2d 1274, 41 Cont. Cas.
Fed. (CCH) 77066, 24 Fed. R. Serv. 3d 584, 18 U.C.C. Rep. Serv.
2d 696 (9th Cir. 1992), opinion amended on denial o rehg, 15 F.3d
855 (9th Cir. 1994) and Belmont Industries, Inc. v. Bechtel Corp., 425
F. Supp. 524, 20 U.C.C. Rep. Serv. 1196 (E.D. Pa. 1976).
1. Restatement (Second) Contracts, 261 (1981).
. Transatlantic Financing Corp. v. U.S., 363 F.2d 312, 3 U.C.C. Rep.
Serv. 401 (D.C. Cir. 1966).
. Raytheon Co. v. White, 305 F.3d 1354 (Fed. Cir. 2002).
. Restatement (Second) Contracts 261 at comment d.
. A typical concern is the reservation expressed by the Jennie-O Foods,
Inc. v. U. S., 217 Ct. Cl. 314, 580 F.2d 400, 409, 24 Cont. Cas. Fed.
(CCH) P 81814 (1978) ([t]he commercial impracticability standard
can be easily abused; thus this court has not applied it with requency
or enthusiasm. It is not invoked merely because costs have become
more expensive than originally contemplated.)
. L.W. Matteson, Inc. v. U.S., 61 Fed. Cl. 296, 320 (2004) citing Seaboard
Lumber Co. v. U.S., 308 F.3d 1283, 1295 (Fed. Cir. 2002) which in turn
relied upon U.S. v. Winstar Corp., 518 U.S. 839, 904-910, 116 S. Ct.
2432, 135 L. Ed. 2d 964, 42 Cont. Cas. Fed. (CCH) P 77358 (1996).
. Impracticability is a coat o many colors, and extends beyond actualimpossibility to include perormance excused because it would entail
excessive and unreasonable costs. Natus Corp. v. U. S., 178 Ct. Cl.
1, 371 F.2d 450, 455 (1967).
. See, e.g., Jennie-O, supra Note 45, at 409.
. Mitchell Canneries v. U.S., 111 Ct. Cl. 228, 77 F. Supp. 498 (1948)
(perormance excused ater bad weather destroyed the blackberry
crop, preventing plainti rom completing contract deliveries); Dillon v.
U.S., 140 Ct. Cl. 508, 156 F. Supp. 719 (1957) (contractor recovered
increased costs o supplying hay to government where severe drought
caused a marked increase in the cost o supplies).
0. J. D. Hedin Const. Co. v. U. S., 187 Ct. Cl. 45, 408 F.2d 424 (1969)
(deault termination improper where contractor made heroic eorts
to obtain cement elsewhere where his supplier could not deliver due
to severe cement shortage o 1955).
1. See, e.g., Tony Downs Foods Co. v. U. S., 209 Ct. Cl. 31, 530 F.2d
367 (1976) ([t]here can be no comparison between contract losses
caused by an unanticipated natural disaster and additional contract
perormance costs occasioned by price controls).
. Ocean Tramp Tankers v. VO Sovracht [The Eugenia], 2 Q. B. 226, 239
(1964). This ormulation o beyond normal price increase has been
cited approvingly in such cases as Eastern Air Lines, Inc. v. Gul Oil
Corp., 415 F. Supp. 429, 19 U.C.C. Rep. Serv. 721 (S.D. Fla. 1975)
and Appeal o Jalaprathan Cement Co., Ltd., 79-2 B.C.A. (CCH) P
13927, 1979 WL 2356 (Armed Serv. B.C.A. 1979).
. Aluminum Co. o America v. Essex Group, Inc., 499 F. Supp. 53, 29
U.C.C. Rep. Serv. 1 (W.D. Pa. 1980).
. Id. at 58.
. Id. at 64-74.
. It is the claimants burden to prove the amount o loss that will be
incurred through perormance. See, e.g. Eastern Air Lines, Inc. v. Gul
Oil Corp., 415 F. Supp. 429, 440, 19 U.C.C. Rep. Serv. 721 (S.D. Fla.
1975) (the par ty undertaking the burden o establishing commercial
impractability by reason o allegedly increased raw material costs
undertakes the obligation o showing the extent to which he has
suered, or will suer, losses in perorming his contract).
. Appeal o Bermite Div. o Whittaker Corp., 77-2 B.C.A. (CCH) P 12675,
1977 WL 2490 (Armed Serv. B.C.A. 1977).
. Appeal o Jalaprathan Cement Co., Ltd., 79-2 B.C.A. (CCH) P 13927,
1979 WL 2356 (Armed Serv. B.C.A. 1979).
. Id.
0. See, e.g., Geronimo Service Company, ASBCA No. 30003, (1985)
(in the absence o an escalation clause, contractor assumed risk o
increased costs caused by 400 percent increase in dumping ees);
Appeal o Ace Service Corp., 86-3 B.C.A. (CCH) P 19031, 1986 WL
20042 (Armed Serv. B.C.A. 1986) (increase in unit cost rom $3.13 to
$10 due to unexpected closure o proximate dump site did not render
contract unconscionable or commercially senseless).
1. Northern Indiana Public Service Co. v. Carbon County Coal Co., 799
F.2d 265, 1 U.C.C. Rep. Serv. 2d 1505 (7th Cir. 1986) (holding that a
government order denying a request rom a utility to pass increased
coal prices along to its customers did not excuse utility rom a long-
term contract to buy coal even though contract was unproftable).
. Id. at 275 and 278 respectively.
. Eastern Airlines, Inc., supra Note 56, at 441.
. Id. at 442. See also, Appeal o Southern Dredging Co., Inc., 92-2
B.C.A. (CCH) P 24886, 1992 WL 47920 (Corps Engrs B.C.A. 1992)
(contractor not entitled to price increase or uel due to Gul War
because volatility in Middle East is normal and increase in price o
oil was entirely oreseeable).
. Chainworks, Inc. v. Webco Industries, Inc., 2006 WL 461251 (W.D.
Mich. 2006), reconsideration denied, 2006 WL 1521946 (W.D. Mich.
2006).
. Webco did not argue that perormance was impossible due to short-
age or that it was unable to deliver the required quantities.
. Id. at *9.
. Speculation Sparks Huge Price Surge Hitting Electrical and Mechani-
cal Costs, Engineering News-Record, June 26, 2006.
. Id. (commentary rom Tony Guzzi, EMCORs President).
0. Steel Market Trends, Modern Steel Construction, March 2005.
1. See Fru-Con Const. Corp. v. U.S., 44 Fed. Cl. 298, 314 (1999); J.
Cibinic & R. Nash, Administration O Government Contracts, 546
(3d. Ed. 1995).
. F.A.R. 16.203-2.
. The three types o F.A.R. project adjustment clauses are: (1) Adjust-
ments Based On Established Prices. These price adjustments are
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based on increases or decreases rom an agreed-upon level in pub-
lished or otherwise established prices o specifc items or the contract
end items; (2) Adjustments Based On Actual Costs o Labor or Mate-
rial. These price adjustments are based on increases or decreases
in specifed costs o labor or material that the Contractor actually
experiences during contract perormance; and (3) Adjustments Based
On Cost Indexes o Labor or Material. These price adjustments are
based on increases or decreases in labor or material cost standardsor indexes that are specifcally identifed in the contract.
. F.A.R. 16.203-2.
. F.A.R. 16.203-2.
. F.A.R. 16.203-1(a)(ii).
. F.A.R. 16.203-1(a)(i).
. F.A.R. 52.216-4.
. The F.A.R. requirement seems to be premised on the notion that
the contractor should not receive any beneft or escalated material
or labor costs i the contractor is late in providing those materials or
labor, since the contractors delay may be responsible, in whole or
in part, or the cost escalation.
0. The F.A.R. Price Adjustment Clause is designed to protect the contrac-
tor rom only signifcant price escalations, but with a maximum cap.
1. Although the F.A.R. allows or some modifcation o, or exception to,
some o the standard components o the Economic Price Adjustment
clauses, these are the essential terms set out in F.A.R. 52.216-4.
. During the latter hal o 2005, and during the hurricane reconstruction
eorts, Portland cement availability became a major concern or the
transportation industry.
. Highway Construction Cost Increases and Completion Issues, United
States Department o Transportation, Federal Highway Administration
(http://www.hwa.dot.gov/programadmin/contracts/price.cm).
. Hot mix asphalt is estimated to be 36% dependent on petroleum
products, and so the hot mix asphalt prices typically ollow a similarpattern to the price o crude oil and diesel uel. Liquid asphalt, the
binder used or hot mix asphalt, is refned rom crude oil. In addition,
mixing, hauling, placing and compacting hot mix asphalt requires
petroleum products.
. During this same January 2002 through the end o September o
2004 period, the rebar price index maintained by the Engineering
News-Record rose by 36%.
. Technical Advisory T5080.3, Development and Use o Price Ad-
justment Contract Provisions, U.S. Department o Transportation,
Federal Highway Administration. This Technical Advisory contains
many useul suggestions regarding material escalation clauses in
contracts, and many o the recommendations are applicable to all
types o construction contracts.
. Virginia Department o Transportation Specifcation Section 5109DIC-
0105, Special Provision or Price Adjustment or Steel, dated Novem-
ber 29, 2004.
. Section 9, Measurement and Payment, Florida standard Department
o Transportation Specifcations.
. http://www.hwa.dot.gov/programadmin/contracts/price.cm.
0. U.S. Department o Labor Bureau o Labor Statistics, BLS Hand-
book o Methods, Chapter 14, at http://www.bls.gov/opub/hom/
homch14_b.htm. The three most important classifcation structures
are (1) industry, (2) commodity, and (3) stage o processing (SOP).
Commodity-based SOP price indexes regroup commodities at the
sub-product class (six-digit) level, according to the class o buyer and
the amount o physical processing or assembling the products have
undergone.
1. Although most PPIs, whether commodity oriented or industry oriented,
are national in scope, regional price indexes are published or a ew
selected items, such as sand and gravel, scrap metals, and ce-
mentitems which tend to be more aected by regional markets.
. In addition, and or users who preer printed publications, a summary
o the PPI news releases is available through the mail and without
charge rom the BLS. This document provides the most recent data
or all SOP indexes and or selected major commodity groupings that
make up the bulk o these indexes. A monthly PPI Detailed Report is
published in print several weeks ater the news release date and is
available to the public rom the U.S. Government Printing Ofce on
a paid subscription basis.
. The revisions to unadjusted Producer Price Indexes are normally
very minor, especially at the more highly aggregated grouping levels.
Very detailed inormation regarding the BLS Producer Price Indexes
(www.bls.gov/ppi) and the BLS Consumer Price Indexes (www.bls.
gov/cpi) is set out at the U.S. Department o Labor, Bureau o Labor
Statistics website.
. ENR also publishes indexes or two Canadian cities, Montreal and
Toronto, on a monthly basis.
. During each month, the weekly editions o ENR report on the price
movements or the various categories o construction materials, as
ollows: The frst monthly editionprices or 21 products covering
asphalt, cement, aggregates, concrete, brick, concrete block, and
masons lime. The second monthly editionprices or 20 pipe prod-
ucts covering reinorced concrete pipe, corrugated steel pipe, vitrifed
clay pipe, PE underdrain, PVC sewer and water pipe, ductile iron
pipe, and copper water tubing. The third weekly editionprices or 18
products covering lumber, plywood, plyorm, particle board, gypsum
wall board, and insulation. The ourth weekly editionprices or 16
products covering structural steel, reinorcing bar, steel plate, metal
lath, aluminum sheet, stainless steel sheet, and plate and H-piles.
. T. Grogan, How To Use ENRs Cost Indexes, Engineering News-
Record, March 20, 2006.
. John T. Oxley, et al. v. Oklahoma Gas and Electric Co., et al., 1982
Okla. Civ. App. LEXIS 114 (May 4, 1982).
. Paragon Oil Co. v. City o New York, 138 N.Y.S.2d 905 (Sup 1955).
. See also, Glopak Corp. v. U.S., 851 F.2d 334, 34 Cont. Cas. Fed.
(CCH) P 75509, 6 U.C.C. Rep. Serv. 2d 1402 (Fed. Cir. 1988)
(Recovery o dramatic price reduction pursuant to a two-way es-
calation clause was not unconscionable or oppressive at the time
o contracting); Firestone Tire & Rubber Co. v. U. S., 195 Ct. Cl.
21, 444 F.2d 547 (1971) (Court rejected the deendants argument
that the price escalation clause covered price increases or steel
commodities such as barbed wire, nails and staples, which had no
relationship to the manuacture and delivery o the objection o the
contract, tract shoe assemblies or tanks); and Bethlehem Steel
Co. v. Turner Const. Co., 283 A.D. 69, 126 N.Y.S.2d 147 (1st Dept
1953), judgment a d, 2 N.Y.2d 456, 161 N.Y.S.2d 90, 141 N.E.2d
590, 63 A.L.R.2d 1331 (1957) (Court determines the defnition o
component materials included in an escalation clause in a steel
purchase contract). These cases, and sample material price esca-
lation clauses, are discussed in the Summer 2006 edition o the
American Bar Association Construction Forums Construct!, in an
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Visit West on the Internet!http://www.west.thomson.com
article by Khanah Josephson and Nicole Liguori Micklich, entitled
Material Price Escalation Clauses.
100. K. Josephson and N. Micklich, Material Price Escalation Clauses,
Construct!, Summer 2006. The authors oered a number o sample
clauses, including this: In the event that, during construction o the
improvement described herein, contractors costs or materials used
or to be used herein are increased by more than ____ % (110%, i
blank) over the contractors costs or same at the time this agreement
was signed, or any cause(s) beyond the control o contractor, then,
and in such event(s), contractor shall have the right to pass the entire
amount o materials costs increase(s) along to Owner by adding the
total amount(s) thereo to the Contract Price.
101. As earlier mentioned, a cost-based escalation scheme requires good
and reliable data or the prices relied upon in the contractor and sub-
contractor bids, as well as reliable cost suppor t or the actual materials
utilized in the project. The use o such provisions adds to the owners
administrative costs and presents possible audit-related expenses.
Moreover, in order to utilize a cost-based escalation provision, the
owner must overcome any tendency to suspect that the reliability o
the cost inormation produced always will be less than desired.
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