By: Christopher W. Morog and Robert T. Ferguson, Jr.

Supply chain and material escalation cost issues have hit the construction industry hard. Many contractors are receiving letters from vendors and suppliers providing notice of anticipated shipment delays or cost increases, followed by claims seeking affirmative relief. While there are ways to manage these types of issues when negotiating new contracts, contractors are asking: how do we handle these issues on our ongoing projects? Unfortunately, there is no easy or universal answer. This is a highly fact-dependent question that must be addressed on a case-by-case basis. However, the analysis usually starts with the contract documents.

At the risk of sounding like a broken record, the specific terms and conditions of the applicable contract documents are absolutely key. Contractors that purchase supplies, materials, or equipment using their own form agreements may well have provisions addressing shipment delays or price fluctuations. In such a case – and depending on the strength of the contract – contractors may have solid contractual bases to respond to their vendors/suppliers. For example, contractors may be able to use “flow-down” and incorporation-by-reference clauses to assert claims against vendors/suppliers in the event of shipment delays. In addition, some contracts explicitly prohibit recovery of escalation costs. Other clauses – like force majeure provisions, liability caps, and liquidated damage provisions – may also be relevant, depending on the facts.

All too often though, contractors – sometimes unknowingly – accept their vendors’/suppliers’ terms and conditions, either by signing third-party purchase order forms or by incorporating quotations into their contracts. In some cases, vendors/suppliers will use quotation and invoice forms stating that the transaction is subject to terms and conditions that are not actually provided to the contractor (with a promise to make the terms available upon request). As you can expect, vendors/suppliers customize their own terms and conditions to afford relief in the event of supply chain issues or price fluctuations.

As a result, it is critical to review the contract provisions applicable to the transaction. In some cases, there may be more than one set of terms and conditions at play, creating a “battle of the forms” scenario. In other instances, general contract requirements may apply. Of course, the contract terms will vary from one project to another. But understanding how the various potential contract provisions fit together is a necessary first step in determining how to handle a vendor/supplier notice or claim. In addition, it is important to understand the potential time and cost impacts that supply chain or material escalation issues may have on the overall project, as well as what constitutes a recoverable claim.

In some cases, the contractor may be able to reject the claim outright based on clear contractual language. In others, the contractor may be able to pass the claim through to the owner. All-in-all, contractors should timely review vendor/supplier claims and request all supporting backup documentation if it is not provided. An initial analysis should be performed to determine the legitimacy of the claim from both a factual and legal perspective. If the claim is one that can be submitted to the owner, the contractor must be careful to comply with the applicable notice and claim submission provisions relating to claims for time and cost impacts. Although it is not yet clear how all the various current supply chain and material escalation cost issues will resolve, these are a few basic steps that contractors can take when these issues arise on pending jobs.