By Ethan Duran
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A Milwaukee attorney said stakeholders must be transparent with each other and build contingency in their building plans amid a tightening construction market.
Josh Levy, a partner at Husch Blackwell, said Wisconsin contractors, owners and developers must work contingencies into their plans before they break ground on a project as disruptions from weather, rising prices and other factors become an inevitability.
The start of the pandemic saw the market for building materials turn unstable and made building projects uncertain for both contractors and developers, Levy said. The pandemic and its lingering effects became a force majeure, or an unexpected event in construction contracts.
“When a contractor believes they’re experiencing challenges they didn’t bargain for they’ll ask relief from the project owner and claim force majeure,” Levy said. “When COVID-19 came along, it truly was a force majeure event. No one had thought work was going to get interrupted by stay-at-home orders, and the first impact of that force majeure was project delays.”
For example, developers who want to build multi-family housing would find themselves behind their timeline or over budget when trying to purchase lumber needed for the wood frame at volatile prices, he added. A project budget can go over by millions of dollars when materials like lumber, concrete and steel prices rise after a contract was arranged.
To prepare for disruptions like rising materials prices, Levy encourages contractors, owners and developers to come up with contingencies in their agreements before sealing the deal. Contingencies can be a line item to keep transparency between the owner and the contractor throughout the project. Parties can share the savings if the contingency isn’t used.
Husch Blackwell’s Construction Academy website offers a three-part course on contingency in construction contracts, Levy said. The firm will host a second Cream City Construction Conference tentatively scheduled for late January.
Wisconsin Law Journal: As contractors, developers and owners plan projects, what are some ways they can prepare for the volatile construction market?
Levy: The most important consideration is the parties to the project have available contingency. That they know they’re pricing a project for millions of dollars but at each level there’s some contingency built into that. The contractors are bidding on a lump sum project, they’re going to bake into their cost some contingency.
Another way to address the challenges of the volatile market is to do early purchase of materials. If you come to me with a project in November with pricing from a lumber company, but don’t know what the prices will be in April when you can get a permit, who knows what the price will be. If the developer has the financing, we can purchase the materials early. An easy but important part of early purchases includes materials storage up to specifications.
Parties have also addressed uncertainty with surety bonds, where a surety company or supplier will guarantee full performance of a supply order. For example, during a project in late 2020, a client had its subcontractor responsible for purchasing lumber provide a supply bond. When the supply house said it couldn’t fulfill the order and the price was higher, it put the risk on the supply house that furnished the bonds.
These are all good protections against volatility, but these are all remedies when challenges arise. You don’t always achieve your remedy. At the end of the day, a successful project in a volatile market requires real time communication between the stakeholders. No contract can accomplish that.
WLJ: How confident are you that contractors, owners and developers will have a good, transparent relationship to benefit projects?
Levy: Unfortunately, there will always be parties that believe they found a shortcut to profitability. There’s always going to be a range of quality projects which means quality controllers in the project. For instance, public construction requires open bidding and usually gravitates towards the lowest responsible bidder. Public construction requires performance bonds because of the risk the lowest responsible bidder may not be able to perform, and the surety comes in and cleans that mess.
On the flipside, there are many quality developers in southeastern Wisconsin and projects we see every day. I’m relatively confident the lessons we’ve learned in the past two years about dealing with volatility are going to pay dividends for projects where lenders understand the contingency that’s going to be needed. Developers will realize they need to incentivize contractors to bring project value. Contractors are by and large wiser bringing these issues to developers.
I think the recent problems of projects are going to feed better planning, hopefully in the long term.