Construction Contract Material Escallation Clause Issues

[Bri Sawyer]

Has anyone run into issues with a contractor trying to enforce a material escalation clause in a construction contract? 

 We have a turn-key build contract in which there is a clause that allows the contractor to pass on any increases in material costs over 7.5% to us the buyer. The Clause in the contract specifically reads " Contract Price is subject to change if anyone material increases
in price by more than 7.5% (Seven- and One-Half Percent) from the date of this contract. Buyer/Owner shall be responsible for the cost of
any increase above 7.5% (seven and a half percent)." 

We received a call from the builder this week that in foundation and framing alone they are currently over budget by $111k and need a check within 7 days. Upon pushing them for invoices they decreased it to $87k but said more is coming once the framing is complete.  Totaling a nearly 75% increase over the original contract amount to this point. The foundation has been completed since May and there has been no mention of overages until this week. There was no warning prior to them completing the work. 

Our contract is from Oct 2021. Upon reviewing the invoices the line items in framing the change in the net price of specific items is less than 1% from the time of bid to the price paid due to falling lumber prices.  Which would indicate to me that the builder was negligent when completing his initial bid rather than the increase coming from material increases.  Secondly, our contract does not have an escalation clause relating to labor so I don't see think that should be passed on to us. 

Has anyone else had something similar happen? What type of documentation would be required to prove there was an actual increase in the material vs mistakes made on the contractor's part? I want to be fair but I'm having a hard time grasping such exorbitant increases when my other projects are experiencing drops in material prices from this time last year. 

[Roarke Van Brunt]

@Bri Sawyer, sorry you hare having this difficutly with your contractor.  Here are my thoughts as a PM for a General Contractor/Developer.

First - all items must have backup supporting the claim of increased prices.  Have them provide the quotes for the supplies when the bid the job or were contracted to the job. Ask for original invoices/quotes vs current invoices.  Based on what you typed I am assuming the excalation is only for materials, make sure thats all this is for.  I don't know how the language reads in your contract but if it doesn't allow for markup, pay only the actual costs of the increased material costs, no subcontractor markup unless otherwise agreed upon. Watch out for switches on the "currrent invoices" write two party checks to suppliers if needed, get your lien waivers, and ask for proof they have paid the invoice.   

Second - Did you go through a submittal process? We only allow escalations a week or so after submittal approval, if the subcontractor waits three months to secure their order from there that is their risk. I also make sure all my contract escalations allow for savings if there are any.  Makes folks less likely to send me random escalations, since I have the ability to request backup for ALL project materials, not just the one they want to escalate.

Third - I am sure your contract allows you to Audit the project, do so at the end. The fact that the escalation was $111k and then $87k when you asked for invoices is nuts.  Get all the paperwork for your review, try to do this as part of reconcillation and retention release since they will need to send a final bill for retention when they are complete. If they send you excalation notices from the supplier that are from three months ago, you should contest that they did not provide them to you in a timely manner. Most contracts have a time to notify in days from when a cost impart was realized by your contractor, if they are outside this window then you have bargaining power also. 

Overall - I generally expect escalation timing to make sense.  When they order the item is when they know the material cost difference not after they installed. Giving you 7 days to write a check witout proper backup is not acceptable. Lean on the contract language, respond with "not approved", don't ghost them, until they provide what you need. I would just keep asking for backup from costs at time of contract, to costs at time of purchase. If there is a difference that is the only number you should discuss, pay what you should when something is adequately backed up.