APR 2022 ~ MARKET UPDATE ~ VALLEY CONTRACTORS FACE COMPLAINTS, LAWSUITS DUE TO RAPIDLY RISING COSTS OF CONSTRUCTION PROJECTS

Dick Roberts, president of Phoenix-based DTR Landscape Development, was contracted to provide landscaping services on a project more than a year ago.

But because he can’t store his product ahead of time, Roberts said he couldn’t purchase the materials he needed now for a price that was quoted months ago, leaving him with two options — be sued or walk away from the project.

“Luckily, I hadn’t started the job, so I basically said, ‘Then go get somebody else.’ It would have been such a financial disaster. It would have been cheaper for him to sue me than to do the job,” Roberts, who also serves as president of the American Subcontractors Association of Arizona, told the Business Journal.

“We’re a landscape contractor, we’re always at the end of projects,” he said. “Due to whatever reason, the job is behind schedule and because of that, our costs have gone up 40%, and we’re not going to eat those costs … We’re not going to knowingly go in and lose money.”

The Phoenix metro construction industry has been hit hard with material and labor shortages because of the Covid-19 pandemic, like the rest of the nation, which has resulted in unexpected cost increases amid high demand and a backlog of production.

This has left many Valley contractors at odds because they didn’t account for cost increases in initial agreements on a project. That’s led some firms to file complaints or lawsuits when companies didn’t stick to the initial price. Some subcontractors have walked away from projects, but without stipulations for price increases in the contracts, many have been stuck with their original agreements, meaning that some are left with costs that could put them out of business, experts say.

“The general [contractor] or owner, they say, ‘Hey, we have to force you to do the contract that you negotiated, and we expect you to show up and we expect you to do it at that price, even if it’s a huge loss or puts you in bankruptcy. You signed it, you didn’t put a surcharge provision in there, so, therefore, you’re stuck,’” said Julie Pace, a construction attorney, and partner at Denver-based Messner Reeves LLP, who said she’s seen an uptick in cases related to costs in recent months.

‘A CIRCULAR MESS’

Once construction projects picked up again in 2021 after the height of the Covid-19 pandemic, the Phoenix metro saw significant price increases and months-long wait times for key materials such as steel and lumber.

“It’s hard to overstate how extreme some of the price increases have been and the pace at which they’ve happened,” said Josh Umar, executive director of the American Subcontractors Association of Arizona. In some cases, material prices were only guaranteed for two days, he said.

Bryan Eto, principal at public accounting and consulting firm BeachFleischman, said rapid price increases has become a big problem for subcontractors since their work doesn’t start until later in a project timeline.

“You either have to upfront the money to buy all that product to lock in that price, or you try and put in some price escalation clauses, which we’ve been advising,” Eto said. A price escalation clause would allow a contractor to pass on the increase in costs for materials.

An exacerbated labor shortage in construction and other connected industries has also worsened the situation, experts noted. According to Eto, contractors sue when the initial agreement can’t be met or when a project is delayed due to factors such as labor. Subcontractors have also sued general contractors to be compensated for the increased costs, he said. “It’s such a circular mess,” he said.

If a subcontractor didn’t include a price stipulation or requirement in the contract, experts say they could be stuck finishing the project if the owner or general contractor isn’t willing to work out an agreement. But this can be especially tough for small businesses that don’t have a lot of resources, said Ricardo Carlo, president of the Associated Minority Contractors of Arizona.

‘LIFE AND DEATH’ OF A BUSINESS

Groups such as the Associated Minority Contractors of Arizona and American Subcontractors Association of Arizona are working to educate contractors about price escalation clauses as well as selecting subcontractors much earlier in the process.

“These clauses went from … ‘Oh, we might overlook it’ to ‘This is the life and death of my business. I might not survive if I do this project at the price I quoted,'” Umar said

Pace said contractors can also include a clause in their agreement called force majeure, which is related to events out of their control. Pace said it’s also important for contractors to have a reasonable approach and be open to changing original agreements with other legal steps.

Contractors can do a change order, which Pace said is a change to the initial order and scope of work between a subcontractor and general contractor. Through this, subcontractors can also suggest the contract be rebid. Otherwise, Pace said, subcontractors may have to go through arbitration, a Registrar of Contractors hearing or a lawsuit, among other options.

RELATIONSHIPS

Don Nottke, vice president of business development, and Steve Bellew, chief estimator for Phoenix-based Derek Builders, a general contractor, said having strong communication with subcontractors during the pandemic has helped them avoid some of these issues.

“It’s how we stay as best we can on top of things,” Bellew said. “Having them forewarn us of what they’re seeing happening with their various suppliers.”

The company most recently learned from an electrical contractor, for example, that certain materials have a lead time of a year to a year and a half, Bellew said. Nottke also said who you know and having strong relationships can help mitigate these issues.

“Some of these guys have great relationships with suppliers. They get an advantage, can have opportunities to get their materials a little bit faster than somebody else, especially anybody that comes here out of state — they’re going to have a way more difficult time trying to connect with some of these major suppliers and subcontractors,” Nottke said.

Other contractors have also resorted to buying materials upfront and paying companies to store products ahead of time in order to lock in the initial price.

Phoenix Business Journal
Used with Permission