When Steel Prices Spike
By: Edward Seglias and Matthew R. Skaroff
Defensive legal strategies and contracts can help fabricators navigate unexpected and dramatic material price fluctuations.
There has been a lot of TALK about how steel prices—along with those of other materials—have risen dramatically, even reaching record highs, over the last few months.
But it is not the first time that has happened—even in recent history.
In 2017, steel prices significantly rose following new tariffs on foreign-made steel, with suppliers drastically reducing the time they would hold quotes. Similarly, 2004 saw at least a doubling in the spot price of almost every type of steel.
Unexpected and rapid rises in the price of steel create problems for many different businesses, but especially for structural steel fabricators. These types of pricing fluctuations can squeeze margins on jobs already under contract, when the steel has not been purchased and when material pricing has not been locked in. They create risk in taking on new work, as the predictability of pricing is now called into question. And while frustrating, this situation is not surprising as subcontractors typically bear the burden of price escalation. But despite these problems, properly written and administered contracts and the law may offer fabricators some relief.
Battling Rising Prices
On existing jobs impacted by rising prices, fabricators have a few pathways. If they were prudent in negotiating their contracts, then those contracts may contain price escalation clauses or other adjustment clauses. Often, such clauses are typically based on a triggering event, such as a certain percentage increase in the price of materials. Likewise, an allowance for material costs would provide for similar relief in the event of spiking prices. But these clauses require the negotiator to have the foresight to include them in the original contract, typically before a major price event such as what we have recently witnessed.
Other contract clauses may also offer options to address cost increases, though these are less likely to provide relief than are specific price escalation clauses. Many contracts include “force majeure” clauses that provide a fabricator with a remedy in the event of an unexpected occurrence, such as a natural disaster, unanticipated government action or inaction (e.g., tariffs), or labor issues. Force majeure language is highly variable from contract to contract, and the particular phrasing could potentially connect enough to the situation behind a steel price increase to allow for contract price adjustment. But the possibility is remote given how such clauses generally are written and interpreted.
Separately, the language of change order provisions alone may be broad enough to justify additional payment to a fabricator. For example, older versions of AIA A201: General Conditions of the Contract for Construction contemplate contractors submitting claims for additional cost based on “reasonable grounds,” which can be interpreted broadly to include unexpected material price increases. Language in contracts regarding changes and claims should be examined closely to see if any of these arguments can be made for adjustment.
Finally, the law itself provides a few doctrines that may help mitigate rapid price increases. Many jurisdictions recognize the concepts of “commercial impracticability” and “frustration of purpose,” which generally set aside contract performance obligations based on an unexpected occurrence resulting in an “extreme and unreasonable expense” or rendering the performance purposeless. Though these doctrines are very difficult to prove in court, they may warrant consideration depending on how extreme the situation may be for a fabricator.
As you can tell, there are no certainties that you’ll be able to recover unexpected price increases that were not previously anticipated during contract negotiations. But things are different now. The art of mitigating risk for new jobs lies in clear language and carefully selected contract clauses with both upstream and downstream parties.
Win-Win
As discussed previously, a price escalation clause or an allowance in a contract with a general contractor should help limit the risk of uncertain future prices. An allowance can also provide a win-win situation; coming in under the allowance price will represent savings to the general contractor, and coming in over will offer protection to the subcontract by providing a right to recover. To make such clauses more palatable for the other party, a fabricator may suggest capping any allowance or price escalation with a guaranteed maximum price, thereby dividing the risk between the parties.
Quotes and bids also need to be carefully coordinated. While bidding on new projects, fabricators should align the timing of fixed quotes from suppliers with the length of time that the fabricator itself holds its bids for a general contractor or construction manager. To the extent that there is a gap in timing, fabricators should strive to include language in their bid to provide for pricing adjustments, if possible.
It is essential that any quotes, bids, or proposals clearly spell out the price obligations, how long they will be held open, and in what scenarios they are subject to adjustment. If a supplier reneges on price or a party refuses to reimburse a fabricator for a price increase, then clear contract language can mean the difference between litigation and negotiated resolution. The most recent steel price spike is not the first, and it won’t be the last. Fabricators should plan accordingly and play defensively to ensure they are well protected and have the proper contract language in place the next time the market jumps.
