Including a Price Acceleration Clause in Your Next Contract

Cotney Attorneys & Consultants

As a roofing contractor, you know how frustrating it can be to start a project, see material costs rise over the course of the project, and watch your profits fall. So how can you protect yourself from such increasing expenses? An ideal scenario is to agree to projects on a cost-plus basis, which means your payment would be based on actual cost plus a set amount for overhead and profit. However, most owners or prime contractors will not agree to that, so adding a price acceleration clause to your contract could be the best option.

What the Price Acceleration Clause Says

The price acceleration clause considers possible increases in labor and material costs and offers protection to the roofing contractor.

The following is suggested wording for a roofing contractor’s contract:

If there is an increase in the actual cost of the labor or materials charged to the Contractor in excess of 5% subsequent to making this Agreement, the price set forth in this Agreement shall be increased without the need for a written change order or amendment to the contract to reflect the price increase and additional direct cost to the Contractor. Contractor will submit written documentation of the increased charges to the Prime Contractor/Owner upon request. As an additional remedy, if the actual cost of any line item increases more than 10% subsequent to the making of this Agreement, Contractor, at its sole discretion, may terminate the contract for convenience.

How the Price Acceleration Clause Works

The price acceleration clause incorporates three critical points:

1. The roofing contractor can revise the contract price to reflect the updated actual cost of labor and materials. In most cases, the roofing contractor uses its own labor force, so there likely will not be an increase in labor costs. Therefore, the clause will refer primarily to material costs.
2. The prime contractor or owner will receive documentation supporting the claim for additional compensation. Essentially, the roofing contractor will offer evidence of the actual cost increase.
3. The roofing contractor can terminate the contract if any single item sees a price increase of more than 10%.

The third component—a termination for convenience—often is removed from the contract because owners and prime contractors may be uncomfortable with that option.

Other Price Increase Considerations

Because owners and prime contractors typically prefer fixed prices before the project’s start, you could face opposition to adding the price acceleration clause to contracts. If that is the case, you might consider buying and storing materials before construction starts to avoid cost increases. In such an instance, depending on the type of job, you could request a deposit to purchase the requested materials.

If you add a price acceleration clause to your contract, it may be beneficial to request the prime contractor also include such a provision in its contract with the owner. That would allow the prime contractor to secure funds from the owner to cover applicable price increases.

Looking Ahead

Although COVID-19 vaccinations are now rolling out, the construction industry likely will face pandemic-related supply chain issues during the coming months. Materials may not be readily available, or they may go up in price. No matter what roofing job you are pursuing, be cautious when providing firm bids for projects that may not start for three or more months. During that time, material and labor costs may rise, and you could be committed to a contract that causes you to lose money.

Date : Jan. 01, 0001