Who Should Shoulder the Cost of Construction Delays?

The pandemic has upended the global supply chain, and developers are feeling the effects. Delays or all-out cancellations for materials have put pressure on already inflated construction and materials costs. When these delays occur after the start of construction, does the burden of cost fall on the contractor, subcontractor or developer? It’s a looming question in the wake of growing supply chain woes.

Construction attorney Cornelius Riordan of firm Robbins DiMonte says that all parties should share in the cost and the risk. “Contractors need to look at it from a team approach. The contract should be structured so that everyone takes a part of the loss,” Riordan tells GlobeSt.com. “If you do it that way, I think that people are more receptive.”

Sharing in the risk of materials delays will require adjustments to standard construction contracts as well as contractor’s agreements with subcontractors. “It starts with the general contract and flows down to the subcontract,” says Riordan. “If you draft a contract where the subcontractor has to bear the brunt of it, then the bids are going to be much higher to account for those potential costs. While subcontractors may have some recourse against the supplier, that result is not certain.” He adds that the subcontractor often has the upper hand in contract negotiations.

These agreements have become necessary in the wake of increasing supply chain delays due to the pandemic, but they aren’t the only reason such a provision is warranted. Riordan has had clients who have suffered materials set backs due to factory issues or even disasters, such as fires at the manufacturer. In one case, a fire at a roofing company led to a 21% increase in costs for that material.

“If you have a cohesive set of agreements going into a project, then you know what the rules of the game are,” says Riordan. “I think that if everyone shares the pain, then everyone is more willing to agree because they know that they aren’t the only one that is going to have to pay for this. It all starts with a team approach at the beginning of the project.”

Riordan adds that in addition to sharing in the risk of delays, the contract could also call for a mini arbitration board, which can serve as an objective third-party to settle disputes that arise due to supply chain disruptions during construction.