Three Types of Contracts Offer Different Benefits and Risks

For the first time in years, construction material costs are rising. In March, the Bureau of Labor Statistics reported numbers showing a 4.8 percent rise in material prices between February 2016 and February 2017.

For contractors who have been working on long-term projects, the price increases could mean lower profit margins, or even losses, as they complete their work. Contractors who are in the estimating, bidding, and contract negotiation stages for new projects will want to ensure profitability and manage risk where possible. In particular, selecting the best pricing system for a project and properly drafting the contract to reflect it is essential, especially during periods of material cost increases.

Three prevalent pricing mechanisms are fixed-price contracts, cost-plus contracts, and guaranteed maximum price contracts. Here’s the lowdown on each type and the benefits and risks with respect to cost changes.

FIXED-PRICE CONTRACTS

Fixed-price or lump-sum contracts are contracts where the parties, sometimes through extensive negotiation, agree upon a fixed sum for the labor and materials to be furnished. Typically, the contractor will prepare a schedule of values where portions of the work correspond with a certain percentage of completion, and pay applications are submitted for the appropriate percentages (often, minus an agreed-upon amount of retention). If the parties want to change the scope of work, a signed change order will be required, and the parties must negotiate and agree upon the change order pricing before signed.

Fixed-price contracts offer contractors limited protection—and in some cases, no protection—in the event of material price increases. Indeed, “the normal risk of a fixed-price contract is that the market price for subject goods or services will change.” (See Seaboard Lumber Co. v. U.S., a 2002 Federal Circuit Court opinion.) Many contracts contain force majeure provisions that excuse or absolve parties from performing their contractual duties in the event of unforeseeable circumstances that are beyond their control and that make performance impossible or commercially impracticable. Examples of such events include “acts of God” like floods, tornadoes, and earthquakes, as well as events such as riots, terrorist attacks, and labor strikes. However, force majeure clauses can be difficult to enforce, and most courts, like the Federal Circuit in Seaboard, view cost changes as a normal, foreseeable risk and not an event that will excuse contractors from further performance. Therefore, when negotiating a fixed price, contractors generally should plan to be held to that price.

However, properly drafted fixed-price contracts can give contractors options to mitigate potential losses arising from cost increases. One strategy is drafting the contract to read that the fixed price is based upon material prices as of the date of signing and that significant increases in material prices will or shall (not “may”) entitle the contractor to an equitable adjustment of the contract price through a signed change order.

Contractors should also be entitled to adjust the contract price or time of completion to account for other problems—like delays, material shortages, or other difficulties acquiring materials—that can occur when costs increase. Such provisions will have better chances of being enforced if the contract specifically defines what constitutes a “significant” percentage increase in price. Additionally, contracts should include provisions protecting contractors from liability associated with delays and shortages. Some fixed-price contracts also provide that in the event the parties cannot agree on a price for change orders, the change order work shall be paid for on a time-and-materials basis including overhead and profit. If contractors are unable to negotiate an equitable adjustment provision, a time-and-material measure for change orders can provide some protection.

COST-PLUS CONTRACTS

For contractors, while the above revisions to fixed-price contracts may be helpful, cost-plus contracts will provide the maximum protection against material cost increases. Cost-plus contracts—also known as time-and-material agreements—are agreements whereby contractors bill for the cost of the labor and materials, plus a fee that is either a percentage of the project costs or an agreed-upon flat fee. When invoicing, contractors include documentation of their payment to subcontractors, vendors, and material suppliers to provide proof of the cost. They then invoice for the cost plus the agreed-upon percentage of the cost.

Unlike fixed-price agreements, cost-plus agreements place the risk of cost overages and increases on the owner. If the contractor’s fee is a percentage of the labor and material costs, these arrangements also create potential for contractors to benefit from cost increases. However, they eliminate the need to negotiate a fixed price, they make change orders much simpler to implement, and in periods of cost decreases, they can benefit owners.

GUARANTEED MAXIMUM PRICE CONTRACTS

While some owners will be wary of cost-plus agreements—especially when material prices are on the rise—guaranteed maximum price (GMP) contracts may serve as a compromise that could help both contractors and owners mitigate risk. GMP contracts are a modified cost-plus option in that they function like cost-plus agreements—contractors invoice for the labor and material costs, plus their fee—but the contracts establish a maximum price for the entire project. Contractors invoice in the same manner they would for a cost-plus agreement, but once the owner has paid the maximum agreed-upon amount, the remaining costs are the contractor’s to bear.

Often, parties to GMP contracts also agree that if the sum of the cost of work and the contractor’s fee total less than the guaranteed maximum price, the difference in the cost and the agreed-upon maximum fee reverts to the owner or is split between the two parties. This makes some owners more amenable to these agreements than they would be to traditional cost-plus agreements, which can make project costs very unpredictable.

Whether parties decide that a fixed-price or cost-plus agreement is best for their needs, they should take care to draft the price terms clearly in order to avoid ambiguity and confusion. Generally, courts enforce contracts as written if they are clear and unambiguous, but if an ambiguity exists, courts will must look to extrinsic evidence to determine what the parties intended, leaving the fate of the dispute to a jury or fact finder. For example, in Rosa v. Long (a 2004 N.C. Court of Appeals opinion), a homeowner and contractor entered into a contract stating that the contractor would build a turnkey dwelling for the “sum of $193,662.60” but later stating that contractor would receive a commission in the amount of 10 percent of all materials, subcontracts, and labor obtained and expended by the contractor. Because these terms suggested that the contract was both fixed-price and cost-plus, a jury decided what the parties intended instead of a judge enforcing the terms as drafted. Clear, proper drafting is essential to increasing the parties’ chances of a predictable outcome in the event of a dispute.

RCMA Supports Campaign to Prevent Fall Fatalities and Injuries

To increase awareness of construction fatalities caused by falls from elevation, the Roof Coatings Manufacturers Association (RCMA) recognizes and supports the Occupational Safety and Health Administration’s (OSHA) awareness campaign to prevent fall fatalities and injuries.
 
Falls from elevation are a leading cause of death in the construction industry, and labor statistics indicate that the number of fatalities and injuries from falls have risen in recent years. Lack of proper fall protection is the most frequently cited OSHA violation.
 
OSHA’s National Safety Stand-Down Campaign takes place May 8 – 12, and will ask employers and workers to voluntarily devote work time to discuss safety hazards, protection, and fall prevention initiatives. Stand-Down events have been scheduled in all 50 states by a host of industry, community, educational, and nonprofit organizations.
 
RCMA recommends that roofing inspections be performed by a roofing professional authorized and capable of making repairs. If homeowners or in-house staff are conducting inspections, they should always first attempt to observe the roof from the ground. Maintenance, repair, and coating applications should be coordinated by a properly trained building owner or by an experienced roof coatings applicator.
 
“OSHA’s Safety Stand-Down highlights the safety risks inherent in roofing where specialists routinely perform high-elevation work,” says RCMA Executive Director Matt Coffindaffer. “We encourage RCMA members to participate in this event by taking a moment to emphasize safety issues and preventative practices, educate others about best practices, and open a dialogue with all shareholders to ensure a safe workplace environment.”
 
Stand-Down participants can use the hashtag #StandDown4Safety on social media to help raise awareness for OSHA’s safety awareness campaign. Participants can also share photos of Stand-Down events, certificates of participation, or highlight their own fall prevention efforts.
 
To learn more about OSHA’s National Safety Stand-Down campaign to prevent falls in construction, please visit the website

Protect Crews With Lightning Detection

INO Weather Pro provides lightning detection to help protect construction crews.

INO Weather Pro provides lightning detection to help protect construction crews.

INO Technologies has introduced the INO Weather Pro, a handheld device that combines area and weather data, such as heat index, altitude and dew point, with lightning detection to help protect construction crews. Although most lightning-detection technology relies on national weather data feeds and requires an internet or cellular connection, the INO Weather Pro has its own sensor providing real-time local lightning detection and direction. The tool detects the distance of cloud-to-ground lightning strikes as far as 40-miles away, providing visual and auditory feedback of lightning-strike distances. With an updatable software interface and a touchscreen display, users are able to customize their dashboards with the information most important to them. The portable device is water resistant and runs on a USB-charged lithium battery.

NAWIC Will Celebrate Women In Construction Week in March

The National Association of Women in Construction (NAWIC) will celebrate Women in Construction (WIC) Week March 5-11, 2017. WIC Week is an important date on the NAWIC calendar. This week helps NAWIC advance its mission to enhance the success of women in the construction industry.

“NAWIC has enhanced the success of women in the industry for more than 62 years. We are proud to highlight contributions of women to the industry during Women in Construction Week,” says NAWIC president Connie M. Leipard, CIT.

The focus of WIC Week is to highlight women as a visible component of the construction industry. It is also a time for local chapters to give back to their communities. WIC Week provides an occasion for NAWIC’s members across the country to raise awareness of the opportunities available for women in the construction industry and to emphasize the growing role of women in the industry.

“Women work in every facet of construction in important roles,” states Leipard. “NAWIC’s goal during WIC week is to raise awareness and visibility of the women in these roles. This increased visibility will promote the recruitment of more women and encourage others to start careers in construction. This will ultimately ease the workforce shortage in the industry.”

NAWIC chapters across the nation will celebrate WIC Week with a variety of activities. Community service projects, jobsite tours, membership drives, children’s activities, hands-on workshops, fundraisers and school programs are some of the ways local chapters will observe WIC Week. Local chapters are also appealing to their local, state and national representatives to issue official WIC Week proclamations. Visit the website to locate a NAWIC chapter near you.

Architecture Billings Index Concludes Year With Positive Growth

The Architecture Billings Index (ABI) concluded the year in positive terrain, with the December reading capping off three straight months of growth in design billings. As an economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI score was 55.9, up sharply from 50.6 in the previous month. This score reflects the largest increase in design services in 2016 (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.2, down from a reading of 59.5 the previous month.

“The sharp upturn in design activity as we wind down the year is certainly encouraging. This bodes well for the design and construction sector as we enter the new year”,” says AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “However, December is an atypical month for interpreting trends, so the coming months will tell us a lot more about conditions that the industry is likely to see in 2017.”
 
Key December ABI highlights:

  • Regional averages: Midwest (54.4), Northeast (54.0), South (53.8), West (48.8)
  • Sector index breakdown: commercial / industrial (54.3), institutional (53.3), mixed practice (51.9), multi-family residential (50.6)
  • Project inquiries index: 57.2
  • Design contracts index: 51.2

 
The regional and sector categories are calculated as a 3-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.

MBMA Welcomes New Membership

The membership ranks of the Metal Building Manufacturers Association (MBMA) are continuing to expand. MBMA recently welcomed Panasonic Corp. of North America (Panasonic) as its 60th Associate member, and Package Steel Systems Inc. as a Building Systems member.
 
Panasonic will be represented by Jon Downey, who serves as the company’s housing and construction market development manager. Package Steel Systems will be represented by Bob Fisette, who serves as the company’s president.
 
“Our members are vital to MBMA’s continued success and influence in the building and construction industry,” says Dan Walker, PE, associate general manager of MBMA. “Each company’s unique contributions help us to advance the acceptance of metal building systems as the building solution within the low-rise commercial construction market.”
 
Based in Newark, N.J., Panasonic Corporation of North America manufactures consumer and industrial products, including building insulation solutions and products for metal roofs and gutters. The company is a subsidiary of Osaka, Japan-based Panasonic Corp., founded in 1918.
 
Package Steel Systems is located in Sutton, Mass. The metal building manufacturer serves customers in the Northeastern region of the U.S.
 
The MBMA is comprised of metal building system manufacturers and their suppliers who fabricate or manufacture materials for the industry, as well as architecture and engineering firms and service providers.

OSB Manufacturing Plant Construction Continues

Work continues in Corrigan on an oriented strand board (OSB) manufacturing plant, the first such facility in the Lone Star State for RoyOMartin. Due to open in fall 2017, the plant represents a $280 million investment, is situated on 158 acres, and adds 165 direct jobs. The Corrigan OSB LLC greenfield OSB plant will ship products throughout the U.S. OSB is primarily used for roof and wall sheathing in construction.

Company officials and the East Texas community celebrated the grand opening of the plant’s administration building, which marked the beginning of the transition from a construction site to a fully operational facility. Construction began in July 2015 and is nearly halfway complete. About 30 employees have been hired to date. Corrigan OSB LLC will complement RoyOMartin’s other OSB mill in Oakdale, La., in manufacturing RoyOMartin-branded OSB products that include Eclipse OSB Radiant Barrier, Eclipse OSB Wall System, TuffStrand, WindBrace, and Structwall.

“We believe East Texans share our passion for excellence and experience,” says Roy O. Martin III, president, CEO, and CFO of RoyOMartin. “We have sold into the Texas market for a long time, and now we look forward to becoming a proactive partner in the community.”

Named a 2016 Manufacturer of the Year by the Louisiana Association of Business and Industry, RoyOMartin brings more than jobs to the region. The company has also earned accolades for safety and employee development programs, including WoodWorks and RoyOMartin University. The former is a program in local high schools that trains students for careers in the wood products industry. The latter is an on-site training program that provides employees a perspective on the business and prepares them for advancement within the company. It also aims to teach behaviors and instill principles that make graduates valued participants in the communities in which they live.

“We’ll extend our philosophy of being ‘employer of choice’ and ‘vendor of choice’ to the region, while maintaining the stability of a company committed to its stakeholders,” Martin adds.

Contractors Are Paid With Electronic Payment Platform

The lienwaivers.io payment platform allows lenders, contractors, title companies and property owners to automate their processes.

The lienwaivers.io payment platform allows lenders, contractors, title companies and property owners to automate their processes.

Lienwaivers.io, a construction payment platform, continues the quest to help contractors get paid faster with the release of four new features: Electronic Waiver Notarization, Same-Day ACH Payments, Automatic W9 Collection with 1099 Preparation, and a partner-ready API.

Witnessed elsewhere in technology, when open platforms like lienwaivers.io enter the market, there’s a shift from buyers purchasing software suites to customers choosing technologies which communicate through APIs. In partnering with industry leaders such as Notarize.com and HelloSign, lienwaivers.io has empowered their customers to take control of their disbursement process.

With lienwaivers.io, lenders, contractors, title companies and property owners can automate their disbursement process and build better relationships, all at a price point that competes with the cost of a check.

Shears Feature Curved Blade

The KD-446L Profile Shears features a curved blade configuration for maneuverability when making tight-curved cuts.

The KD-446L Profile Shears features a curved blade configuration for maneuverability when making tight-curved cuts.

Kett Tool Co. introduces the KD-446L Profile Shears, featuring a curved blade configuration for maneuverability when making tight-curved cuts in profile and flat materials.
 
Professionals working in the construction, metal building, metal fabrication, roofing and other industries will appreciate the flexibility of the KD-446L thanks to its lightweight design and ability to cut corrugated and flat metal, as well as soft non-ferrous metals at a radius as tight as three inches. At only 15 inches long and weighing five pounds, the KD-446L provides the versatility to make curved cuts while maintaining comfort and control.
 
The KD-446L features a five-amp pistol grip, variable speed motor that allows users to control speeds from 0 to 2,500 RPMs. The shears cut profile and flat materials up to 18-gauge cold-rolled (C.R.) mild steel, soft non-ferrous metals like aluminum, copper and brass (up to .090 inches thick); wire mesh and many other sheet materials – all at speeds of up to 28 feet per minute.
 
The cutting blades are made from quality steel, heat treated and precision ground for extended operation.
 
To see the KD-446L Profile Shears in action, watch the video here.  
 
KD-446L Profile Shears are available through authorized dealers. For more information or to locate a dealer, visit the website or call (513)271-0333.

MCA Announces Metal Roofing Championship Game Winners

The Metal Construction Association (MCA) has sponsored its 3rd annual Metal Roofing Championship Games at the Metalcon International tradeshow in Baltimore, Md. The event was sponsored by Triangle Fastener Corp., Roof Hugger LLC, D.I. Roof Seamers, S-5!, Drexel Metals Inc. and New Tech Machinery. Award sponsors were Akzo Nobel Coatings Inc., ATAS International Inc., Atlas Bolt & Screw Co., The Bradbury Group, Chicago Metal Supply and Fabrication Inc., Designandbuildwithmetal.com, Englert Inc., Modern Trade Communications Inc., Novagard Solutions, PAC-CLAD Petersen Aluminum Corp., SFS intec and Valspar.

Each day had five battles, inspired by this year’s theme ‘Battle Stars Over Baltimore’ in honor of the birthplace of our star-spangled banner. The battles were appropriately named the Triangle Fastener “Screwgun Challenge”, Roof Hugger’s “Hug-A-Roof”, New Tech Machinery/Drexel Metals’ “Install-A-SSR Roof”, D.I. Roof Seamers’ “Seam-it-Up” and the S-5! “Let-It-Snow”.

Ten teams of two contestants each pre-registered to compete during the two-day event. The contestants represented construction companies; Thomas Phoenix International of Easthampton, N.J.; DYMI Construction Inc. of Morrisville, Pa.; Hardin Construction LLC of Union Bridge, Md.; Intermountain Roof Advisors of Salt Lake City, Utah; Rosselli Roofing and Siding of Wantage, N.J.; William Molnar Roofing Inc. of Riverview, Mich.; ARCON of Vanceboro, N.C.; Mad Metal LLC of Arden, N.C.

A total of $5,800 was awarded to the battle winners this year. The top awards for each day were a grand prize and a best quality. The first winner for both the grand prize and best quality awards was Joe Allen and Paul Kulb of Thomas Phoenix International and on the second day the same was awarded to Dennis Duce and Gonzolo Tellez of Intermountain Roof Advisors. Dennis Duce states “It was an honor to be part of this event and we are looking forward to competing next year again”.

Next year, the event will be held in Las Vegas on Oct. 18-20. The MCA Roofing Games Committee plans to make this event a hallmark to the Metalcon International Tradeshow by awarding a National Metal Roofing Championship. To present this award, the overall winner of each of the two days will return on the third day of the show for a competition to compete for the title of National Metal Roofing Champion. Next year’s teams will be able to pre-register for the event beginning in February 2017.