Putting Contracts to Work

September 13, 2022

Tools to offset volatile conditions

Ongoing issues in the supply chain demand new strategies from contractors as they battle shortages, extraordinarily long lead times, and unstable prices. "Contractors are working with tighter margins than ever, and need to leverage every tool possible to protect their companies and the projects they're working on. Their surety can be an important partner in identifying and utilizing those tools." says Merchants Bonding Company's Jason Dettbarn, Senior Vice President, Contract Underwriting. One of the most powerful tools available is the contract. Contracts can be written to provide additional controls, and understanding various contract terms, common clauses, and how they can be written to support the contractor, is key.

Three contract clauses to consider:

1. Bid language that provides an adjustment allowance for increased material costs above the pricing reflected in the bid. The bid should clearly state how long bid prices are good and at what point adjustments can be made in the event awarding of the contract is delayed.

2. A price escalation clause in the construction contract to pass material price increases to the owner. The price escalation clause should specifically identify applicable materials and establish the parameters for a price adjustment.

3. A change order provision that allows for modifications to the contract due to material price increases. The clause should identify the type of documentation required to substantiate the change order request due to increases in material pricing. A combination of good business practices and well-crafted contracts can make the difference during these volatile times.

Contractors can always look to their surety for advice and support. Merchants' construction expertise and familiarity with markets and industry trends can assist contractors in protecting themselves and avoiding claims.