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    practical tight-knit briefngs including action guidelines on construction contract topics

    ConstructionBriefngs

    I. Rampant Construction MaterialPrice SpikesA. Causes o Steel Price EscalationB. Other Factors in Material PriceEscalation

    II. The Impact o Price EscalationA. Delayed or Cancelled ProjectsB. Lack o Firm Price QuotesC. Reduced Numbers o BiddersD. Higher Project CostsE. Stolen Construction Materials

    III. Historical Allocation oEscalation RisksA. Evolution o CommercialImpracticabilityB. Requirements o the Deense

    IV. Tools or Mitigating and SharingEscalation RisksA. Bid Contingencies and ContractAllowancesB. Value Engineering or SubstituteMaterialsC. Early Material PurchasesD. Early Material Supply Commitments

    E. Early Involvement o SpecialtyContractorsF. The Use o SurchargesG. Favorable Force Majeure ClausesH. Delay the Construction ProjectI. Flow Down the RisksJ. Bulk Material Purchases and SupplierPartnershipsK. Material Escalation ClausesL. Index-Based Escalation ClausesM. Cost-Based Escalation Provisions

    V. ChecklistA. Practical TipsThe OwnersPerspectiveB. Practical TipsThe GeneralContractors or Construction ManagersPerspectiveC. Practical TipsThe Subcontractorsand Suppliers Perspective

    VI. Reerences

    The authors...

    In brie... Material Price Escalation: Allocating

    The RisksBy John Gallagher and Frank Riggs

    Th pcdtd calati matial pic i th c-

    tcti idty v th lat th ya ha cad iicat

    acial hadhip ppad ppli, bctact,

    ctact, ad w. W d tatitical mmay thctact l d, pjct dlayd, i dipt

    lti m th t ctcti idty play t

    mitiat, hit cp th acial cqc thi dd

    ad damatic matial calati. Yt, it i ctai that pt hav

    b lt, latihip hav b damad, pjct hav b

    impactd, ad ctcti lawy hav b calld p t lk

    way t t hit th impact matial calati thi

    ppad ctcti clit. I thi aticl, w viw m

    th taditial lal mchaim ad l law acti th

    allcati matial pic calati ik. I additi, w t

    t m th additial tl bi tilizd i th idty id t mitiat matial pic calati ik. Fially, w ha

    m thht matial pic calati cla i ctcti

    ctactwhat i bi d i th pblic ad pivat ct,

    m dic i calati cla tct, ad m -

    ti hw w, ctact, bctact, ad ppli

    miht appach calati cla.1

    I. Rampant Construction Material Price Spikes

    A mb ctcti pdct hav damatic pic

    ica i ach th lat w ya.2 Th pic tl ad

    50% t 60% i th t hal 2004 al, at ya ith fat

    alli pic. Althh th tl pic lvld i 2005, tl

    matial pic w th i aai ali thi ya. Di th

    pid m Mach 2004 t Mach 2005, th Pdc Pic

    Idx hihway ad tt ctcti 12.7%. Aphalt

    ad bick, which wt p i pic hly 4% p ya m 2003

    thh 2005, ddly pikd by 38% btw At 2005

    John Gallagher and Frank Riggs are

    partners in the Construction Practice Group

    at the Atlanta ofce o Troutman Sanders.

    40405252 NO . 20 06 12 DECEMBER 2006 2006 THOMSON/WEST

    December 2006

    Thi s r eproduct i on has been made wi t h t he permi ss i on of t he publ i sher ofConstruction Briefings, Thomson/ West , 610 Opper man Dr i ve, Eagan, MN55123. Fur t her r epr oduct i on wi t hout t he per mi ssi on of t he publ i sher i spr ohi bi t ed.

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    Construction Briefngs/ December 2006

    Construction BriefngsThi pblicati wa catd t pvid y with accat adathitativ imati cci th bjct matt cvd;hwv, thi pblicati wa t caily ppad by plicd t pactic law i a paticla jidicti. Th pblih it ad i di lal th pial advic ad thipblicati i t a btitt th advic a atty. I y qilal th xpt advic, y hld k th vic a cmpttatty th pial.

    ConsTruCTIon BrIeFIngs (Issn 0162-3176) i id mthly, 13tim a ya with tw i i Jaay; pblihd ad cpyihtd 2005

    by Thm/Wt 601 oppma Div, P.o. Bx 64526 st. Pal,Mn 55164-0526 a http://www.wt. thm.cm a Th bciptii $867.00. F bcipti imati: call (800) 2219428, witWt, Cdit odi Pci 620 oppma Div, P.o. Bx64833 st. Pal, Mn 55164-9753 a Pidical Pta Paid at st. Pal,Mn a Ptmat: sd add cha t Ctcti Bi 610 oppma Div P.o. Bx 64526 st. Pal, Mn 55164-0526.

    generAL PHoToCoPY noTICe: rpdcti, ta i a tivalytm, tamii thi pblicati ay pti it i aym by ay ma, lctic, mchaical, phtcpyi, xaphy,acmil, cdi, thwi, witht witt pmii iphibitd. F athizati t phtcpy, pla ctact th CpyihtClaac Ct at 222 rwd Div, Dav, MA 01923, usA(978) 7508400; ax (978) 6468600 Wt Cpyiht svic at 610oppma Div, eaa, Mn 55123, ax (651) 6877551. Pla tli thpcic matial ivlvd, th mb cpi y wih t ditibtad th pp mat th .

    ad At 2006. Th PPI idx bick ad

    tctal clay til climbd m a 3% ica

    i 2004 t a ica 9.5% i 2005. gypm

    pdct pic hly 20% p ya i 2004,

    th by a lik amt i 2005, ad th aai i

    th 12 mth thh At 2006. Al, dill, a imptat pdct i th ctcti

    idty, i pic by 54% i 2002, 13% i

    2003, 38% i 2004, 46% i 2005, ad 26.6% m

    At 2005 t At 2006.3 Th tatitic a

    ihti, ad th pic ica hav b

    dd, xtm ad xpctd.4

    A. Primary Causes o Recent

    Material Escalation

    Th a may ca th ct matial

    pic piki i th ctcti idty. Thy

    ivlv bth dmtic ad itatial makt

    c, a wll a apct th ctcti

    idty that mak it paticlaly cptibl t

    abv-ava ct ica.5

    Th ct, damatic calati ctc-

    ti matial pbably ba i lat 2003 ad i

    th t qat 2004 with damatic cha

    i th tl maktplac. Pi t lat 2003, tl

    pic had b th bjct ly mdt ifa-

    ti v th lat 20 ya. I th atmath

    th 2001 ci i thi cty, th ctc-

    ti idty, ad paticlaly th matial

    pic cmpt that idty, xpicd

    littl i ay ifati. I th calda ya mDcmb 2000 thh Dcmb 2001,

    th Pdc Pic Idx (PPI) ctcti

    matial ad cmpt, a pblihd by

    th u.s. Ba Lab statitic, hwd

    cha, ad th vall PPI ihd d

    actally ll 1.6%, whil th Cm Pic

    Idx (CPI) at ly 1.6%. Di 2002 ad

    2003, th ifati pict maid aly th

    am.6 By aly 2004, th tl maktplac

    chad adically, ad th impact vbatd

    thh th ctcti idty.7

    Causes o Steel Price Escalation

    Th ca th kyckti tl pic i

    aly 2004 icldd th llwi:

    Growing World Demand for Steel

    Th lat dcad ha damatic cmic

    ad ctcti bm i th pat thwld, paticlaly i Aia, ad pcially i Chi-

    a, Idia, sth Ka, ad Japa. Chia i pd-

    i billi dlla ach ya ctcti

    pjct i bildi w citi, bcmi m

    idtializd, ad impvi it iatct.

    Chia i pdi appximatly $25 billi t

    ppa th 2008 smm olympic al.

    Ctcti th Th g Dam, which

    will b th lat vlm cct dam i th

    wld, i xpctd t ct $25 billi, ad wh

    cmplt will ctai 14.86 milli cbic mt

    cct. Caal bi bilt t cay wat

    m Chia lat iv t liv wat

    hta i th Chia i a xpctd

    t ct $58 billi. Thi sth-t-nth Wat

    Divi Pjct i th lat wat divi

    pjct all tim.8 Di 2005, Chia cmd

    appximatly 25% th wld tl pply.

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    Construction Briefngs/ December 2006

    Chia al cmd, i 2005, appximatly

    40% th wld cmt pply.9 Th lit

    iicat ctcti pjct dway i

    Aia ad .

    I a vy ht pid, Chia wt m bi

    a la xpt ad th aw matial t

    bi th wld lat impt .10 Th

    ya a, ad i l tha tw mth, cap

    i pic icad 300% i th itatial

    maktplac, a Chia ad th cti ap-

    pad t b willi t pay whatv pic th

    makt wld ba i d t l Aia c-

    tcti pjct d. Th pic tl bam

    ad clm tl damatically a u.s. mill

    had t pay m ad m th l ad l

    availabl tl cap.

    Consolidation of Production Facilities

    A cd act that ctibtd t th pc-

    dtd calati tl pic ad t th ma-

    tial pic pik wa th act that th pdcti

    capacity dmtic pdc had, v tim,

    adjtd t tay v with, bt t ahad , makt

    dmad.11 I th tl plat makt, th u.s. had

    a clidati -cap-bad pdcti

    aciliti i th pi dcad. siicat xpai that capacity, i th ac viht matial

    pic pik, wa laly impibl.

    Reduced Coke Availability

    Th dcd availability mid ck, d

    with tl cap i th pdcti tl plat

    al impactd th tl pic pik ad ht-

    a. A l-lati btaa i th ly

    dmtic mtallical ck mi wa ill-timd

    ad addd t th tl pic p.12

    Diversion of Material Orders for Federal

    Emergencies

    Th dal vmt divi dm-

    tic tl d i city applicati

    i Iaq ad th lcati al playd a l i

    pic calati, pcially tl pic calati.

    Th xci mcy athity by th

    u.s. Dpatmt D cad m thdlay i dmtic tl pdcti.13

    B. Other Factors in Material

    Price Escalation

    sm th makt c idtid abval playd havc with th pic th c-tcti matial. I additi t th act,hwv, th llwi cicmtac actd,ad may cti t act, th pic dmticctcti matial.

    High Energy and Transportation Costs

    F cctiv ya, dil l pic

    hav icad damatically. F xampl, b-tw May 2005 ad May 2006, dil lpic appximatly 40%. sch picica pt at ad dict p thct i qipmt ad dlivi c-tcti matial. I additi, icad cdil pic talat it hih ct mt p-tlm-bad pdct. F xampl, btwMay 2005 ad May 2006, ptlm-badplatic ctcti pdct icad i picby 18%, ad aphalt pavi pic icad

    30%. I additi, a may dmtic ihav b witchi v t liht cd adth pdcti lw-l dil l, thqatiti availabl aphalta by-pdct ith y pcha dcad.14

    Residential Construction Demands

    Th ht idtial ctcti makt i thuitd stat ha addd t th p thpply id ctcti matial.15 sm th mt damatic pic ica hav ccd

    with lmb ad plywd, matial impactd byth dmad th hi makt. Lmb pic- icad a ava 25.8% i 2004, whilplywd pic a ava 21.5%.16

    Natural Disaster Impacts

    Hica Katia, Iva, rita, ad th at-al diat v th lat w ya ctibtd,

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    Construction Briefngs/ December 2006

    at lat i th ht tm, t bth th pply id

    ad dmad id p.17 Plyviylchlid

    pic hav i damatically th cc-

    tiv ya, ad icad 20% btw At

    2005 ad 2006.18 spt hta llwd th

    hica latd htdw i 2005, a ipdcd m il w tmpaily avail-

    abl th maact PVC ad th

    viyl pdct. Dama m hica al

    impactd th taptati t ctc-

    ti matial.19

    II. The Impact o Price Escalation

    Th impact th ctcti idty

    th ct, pcdtd pic calati hab mlti-ld. Ctaily, ci hav cm m

    th ctact ad bctact cmmity

    dd limiatdpt mai, a wll

    a iicat pjct l. o la pjct,

    tw pmit tctal tl abicati cm-

    pai lt th battl with tl pic calati

    ad dclad bakptcy.20 I additi t lt

    , ad damad dtyd ctcti

    bi, th ippl ct thi damatic

    pic calati ha icldd m th

    impact.

    A. Delayed or Cancelled Projects

    I th wld pivat dvlpmt, matial

    pic calati ha b iicat h t

    ca may dvlp t thik th m-

    b cay t mak a pivat dvlpmt

    wthwhil. Dlayd pjct, dcd-i-cp

    pjct, caclld pjct hav b th -

    lt. Th am impact i bi lt i th pblic

    ctcti ct.

    F pblic pjct that mt b dd by

    bd i, iicat pjct pic ica

    pt pcial pblm. I a mb pj-

    ct, btw th tim a bd wa appvd by

    th vt ad th tim bid w civd

    ctcti pjct, matial pic icad

    iicatly ad bid cam i at pic mch

    byd th appvd ctact amt. Pblic

    bdi a th acd with th altativ

    ptti pjct hld whil pplmtal

    di i ht, cacli th pjct i ad-

    ditial my i t availabl, attmpti t

    cal-dw th pjct cp.21

    F xampl, i octb 2006, cial at th

    Bl Plai Advacd Watwat Tatmt

    Plat i Wahit, D.C., w cd t hlv

    pla t bild th wld lat itallati

    -hapd dit i liht damatic pic

    ica. Th D.C. Wat ad sw Athity

    civd ly a il bid th pjct, ad that

    $306.7 milli dlla bid wa almt 64% v

    th w bdt timat. Th ttal pjct

    ha calatd i ct m a iial bdt $148 milli i 2000, t a vid bdt $350

    i 2006, ad w t a timatd $600 milli

    bdt i 2007.22 Th Flida Dpatmt

    Taptati ha dd a lat $1 billi

    hihway ctcti v th xt th ya

    d t hih ct aphalt, cct, tl, ad

    athwk.23

    B. Lack o Firm Price Quotes

    I th pat, al ctact w abl t

    hld bctact ad ppli t thi qt

    60, 90, phap 120 day. Tday, with

    th bctact ad ppli wh wk

    i paticlaly itiv t matial pic cala-

    ti, it i icaily diclt t t a m qt

    ay iicat pid tim. spaki abt

    th vlatility i th cpp pdct maktplac,

    Mak shti, Vic Pidt raydc Cp.,

    a idtial ad cmmcial lctical ctac-

    t i rcht, nw Yk, cmmtd: ovd a qti pic that a d ly

    a matt h.24 I p t th Ctc-

    ti Fiacial Maamt Aciati 2006

    ctcti idty aal acial vy,

    m tha 80% th pdi al ctac-

    t ad bctact ptd dca i th

    dati bid pic aat.25

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    Construction Briefngs/ December 2006

    C. Reduced Numbers o Bidders

    I pat bca th ct lvl activ-

    ity i th ctcti idty, bt al i pat

    bca calati a, w a di

    w bidd thi pjct. stat whaphalt ppli hav b impactd a i

    w bidd hihway ad pavi pjct.26

    ow a i m bidd pjct

    ad a vall dcti i th mb bid-

    d pjct.27

    D. Higher Project Costs

    Th pjct that hav t b cappd

    iicatly dlayd a a lt pic cala-

    ti diiclti hav qtly xpicdhih pjct ct. Ctact ad ppli

    a adi pttial, t pic calati,

    ad th abc pic calati cla i

    mt ctcti ctact, t lad t hih

    ctact pic ad la pjct ct.

    E. Stolen Construction Materials

    I J 2006, a Bkly, nw Yk c-

    md a hitic wah. Th wa cad

    by a vaat wh wa tippi cpp wi tll a cap.28 Cpp ha bcm valabl

    that ctact a lctat t t cpp ma-

    tial a jb it a that it will b tl.

    With cpp pic at hitic hih, th ct

    byi placmt cpp pdct at th d

    th pjct ca b xpiv. Mchaical ad

    lctical ytm a paticlaly impactd by

    ii cpp pic. 29

    III. Historical Allocation oEscalation Risks

    Althh th cqc ad da

    ampat matial pic calati a may ad

    cmplicatd, ctcti idty mmb a

    t witht tl ad pti i mitiati

    hai th ct ad chdl impact mat-

    ial pic calati. Iitially, w will cid

    blw th xtt, i ay, t which taditial

    ctcti ctact ad l-tablihd lalpicipl may b aitac t ctact,bctact, ppli, ad w acimatial pic calati da.

    ealy ctactal ik allcati wa ctlldby yildi picipl that ba with tictbvac th actity ctact tm-pd ly by impibility i th ablt

    th wd. Impibility a a xc pmac i a acit lal ccpt, ta-ditially limitd i applicati lly t thitac wh pmac had b dd

    actally impibl d t pvi ca.Th, th m pibility pmac, matt hw liht, ha ld t impibilitya a xc l cad by Act gd, act vmt, th alt th th paty.30

    Th c maj cla, ccivd ctia ad cmmly d i tday typical c-tcti ctact, i th ctactal xpi thi impibility ccpt.

    Th hitical appach t ik allcati dt icad cost pmac ha mpha-izd tict cmt th bt thbaai. Fdd i th rma lal maxim

    pacta sunt servanda,31 pati m acit timhav b bd t th xp tm thibaai. Thi appach d it xpi ich aly elih dcii a Pardine v. Jane.32

    Adpti th tac ablt liability cditial pmi mad by pati t actact, th ct ad wh th paty byhi w ctact cat a dty cha p

    himl, h i bd t mak it d, i h may,twithtadi ay accidt by ivitabl -city, bca h miht hav pvidd aait

    it by hi ctact.33

    o w spm Ct i a aly cadd th cmpti ccpt actalimpibility ad actity ctact i th c-tcti aa.34 I i t pvid li t

    a ctact wh pmac wa ddm diclt a a lt ttlmt d tlatt dct i th il, citi Paradine th

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    Construction Briefngs/ December 2006

    Ct ld:

    That cvat [cmplti th bild-i] it wa hi dty t lll, ad h wabd t d whatv wa cay t itpmac. Aait th hadhip thca h miht hav add by a pviit th ctact. nt havi d , it i ti th pw thi ct t liv him.H did t mak that pat th bildit ad ccpati. It cld tb ccpid with th aty t th liv th imat. It i a wll-ttld l law that i a paty by hi ctact chahiml with a bliati pibl t bpmd, h mt mak it d, lit pmac i dd impibl byth act gd, th law th th paty.u diclti, hwv at, willt xc him.35

    A. Evolution o Commercial

    Impracticability

    Md Amica jipdc, tmpd

    by cmmcial aliti, ha mvd byd th

    qimt ablt impibility ad ha

    cizd that li may b availabl d

    ctai cicmtac wh phibitiv ct

    ha dd a dtaki cmmcially

    impacticabl.36 It hld b td that i may,

    i t mt th pply ad ctcti ca

    i which a paty k li d t cmmcialimpacticability, th paty al ht li -

    d th clly latd dcti tati

    pp37 ad mtal mitak38 act, a

    wll a c maj.39 Bad p it xplicit

    mphai ica th ct pmac,

    th ath limit thi viw t cidati

    cmmcial impacticability applicati. Th

    ccpt cmmcial impacticability ha b

    cdid i th uim Cmmcial Cd 2-

    615. Whil ctcti ctact a pimaily

    vic ctact (a ppd t mly matial

    pply ctact) ad t ally cidd

    t b withi th ambit th u.C.C.,40 i dcidi

    u.C.C. ca dali with cmmcial impactica-

    bility, th ct i mt ca xply cid

    bth u.C.C. 2-615 ad rtatmt Ctact

    (scd) 261. Thi hldi a th ap-

    plicabl t ctcti ca, ally. scti

    261 th rtatmt Ctact (scd)

    titld Dicha by spvi Impactica-bility, t th th cmm law applicati.41That cti tat that

    [w]h at a ctact i mad, a paty

    pmac i mad impacticabl with-t hi alt by th ccc a vtth -ccc which wa a baicampti which th ctact wamad, hi dty t d that pmaci dichad, l th laa thcicmtac idicat th ctay.

    Th impacticability ccpt i t a pci tatic , bt ath pt th v-hit-

    i li, daw by ct hplly pivt cmmcial pactic ad m, i whichth cmmity itt i havi ctact

    cd accdi t thi tm i twihdby th cmmcial l qii p-

    mac.42 Whth pmac paticlactact wld b cmmcially impacticabl ia qti act.43

    F ctact ki li d t dva-tati matial pic ica, cmmt d t

    rtatmt scti 261, cidd i ilati,pvid camt. It ad:

    Pmac may b impacticabl b-

    ca xtm ad aabl diclty,xp, ijy, l t th pa-ti will b ivlvd. A v hta aw matial ppli d t wa,mba, lcal cp ail, htdw maj c pply, th lik, which ith ca a makdica i ct pvt pmacaltth may bi th ca withi thl tatd i thi scti.A m chai th d diclty xp dt ch ca a icad wa, pic aw matial, ct ctcti,l wll byd th mal a, dt amt t impacticability ic it ithi t ik that a xd-pic ctacti itdd t cv.44

    Cmmt 4 th u.C.C. 2-615 imilaly tat:

    a v hta aw matial ppli d t a cticy ch a wa,mba, lcal cp ail, htdw maj c pply thlik, which ith ca a makd icai ct altth pvt th ll

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    Construction Briefngs/ December 2006

    m ci ppli cay t hipmac i withi th ctmplati thi cti.

    A viw th applicati by th ct th

    picipal cmmcial impacticability i th

    aa pply ad ctcti ctact whth ctact wa acd with iicat pic

    ica d t makt vlatility i, hwv,

    bi.45

    B. Requirements o the Deense

    T pvail a d cmmcial impac-

    ticability, a paty mt hw (i) a pvi

    vt, ith a act gd a act a thid

    paty, mad pmac impacticabl, (ii) th

    -ccc th vt wa a baic amp-ti p which th ctact wa bad; (iii) th

    ccc th vt wa t th paty alt;

    ad (iv) th paty did t am th ik th

    vt ccc.46 Th -alt qimt

    i mly a qitabl thhld ad, i th ca

    pic ica cad by makt vlatility,

    hld p hdl t th ctact ki

    li l th ctact ca b hw t hav

    b lit i th chdli hi matial

    pcha, dlayd th jb, thwi hav

    ctibtd t th pic impact xpicd. Mt

    ca a dcidd th bai th th th

    qimt.

    Impracticability o Perormance

    Th it p th impacticability d-

    qi bth a pvi vt (

    that cc at xcti th ctact) ad

    impacticability pmac. Impactica-

    bility ha tw mai cilal impibility

    ad xtm ct.47 Ct imly qi a

    hwi objective, ath tha m subjective

    impibility. F itac, i ca i which th

    ctact i abl t pm d t th ail

    it ppli hi w iability t btai ma-

    tial, it mt th pv that th c-

    tact cld pvid pmac bca th

    qid matial w abltly availabl

    withi th bdai a aabl aa p-

    mac.48 Bth atal diat49 ad maktvt50 may cat ch bjctiv impibilitya will jtiy li. gally, hwv, cthav b m lit i ati li i ca

    ivlvi atal diat tha th cad bymakt vmtal impact.51

    Icad ct, a idicatd by rtatmt 261, cmmt d, mt b a ct which i wll

    byd th mal a. o ladi Bitihca aii t th 1967 sz cii ad thicad ct t hippi it catd tatd thatpmac mt b m tha mly

    xpiv. It mt b pitivly jt t hldth pati bd.52

    A itctiv (bt lly) ca i which thctact cclly btaid li d t

    btatial ica i matial ct wa thALCOA ca b t th il cii th1970.53 ALCoA td it a l-tm ctactwith ex ex t pply ALCoA with

    almia which ALCoA wld th mlt itmlt almim t t t ex thpci. Th ctact ctaid a cmplicatdcalati mla that wa tid t th Whlal

    Pic Idx-Idtial Cmmditi (WPI) ad

    t ava hly lab at paid by ALCoA atit plat. Dvlpmt th calati mlawa th pdct mch ach, icldipaticipati by Ala gpa. ALCoA al

    wa t achiv a tabl t icm abt 4ct p pd almim cvtd. exht a l-tm pply at a avabl pic.Th calati mla wa ttd xtivly

    i pat data t that it wld yild thcct lt.

    F a mb ya th mla wkda plad. utatly, bii i 1973,

    th pik i y ct tid by oPeCacti, i cct with aticipatd plltictl ct, atly icad ALCoA yct. ey wa th picipal -lab ct

    act i almim pdcti. Hih yct atly dittd th mla impact,thby yildi pic ica wll blw

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    ALCoA icad ct. ALCoA claimd that

    it wld l i xc $75 milli v th

    maii tm th ctact. It ht li

    ai, am th thi, mtal mitak

    act ad cmmcial impacticability. Th ct

    ad bth ct. It dtmid that th-ccc a xtm dviati th

    WPI-IC ad ALCoA -lab pdcti ct

    wa a baic [mtal] ampti which th

    ctact wa mad ad that ALCoA ith a-

    md b th ik th dviati byd

    th abl limit ik.54 It al d th

    ablt amt ad ppti l ALCoA

    wld d th maii tm th

    ctact t b v h t waat li,

    ditiihi th ca th d m

    ali ca dyi li icad ct

    d t makt c.55 I liht it di

    th itt th pati, th ct md th

    ctact by implmti a w pici mla

    that wld yild lt m i li with th

    pati xpctati th maii tm

    th ctact.

    utatly bqt ctact

    ki t ly pALCOA, th ct did t

    pvid ay maabl d diticti

    btw th l cad by makt pic vla-tility which will b dmd cit t mit

    li m th t wll byd th mal

    a. Bth p- ad pt-ALCOA ca -

    t that th paty ki li i qid t

    pv xtm l.56 Th icc imply

    tp btatial ica d t d

    th ctact cmmcially l.57 F x-

    ampl, i Jalaprathan Cement Company, Ltd.,58 a

    cmt cmpay wa awadd a pply ctact

    a ttal xd-pic. Th ctact ctaid

    pic calati cla. D i la pat

    t btatial, xpctd ica i ctai

    matial ct ad tp il cii latd l

    ica, th ctact td t ic a ttal

    l appachi a thid th iial ctact

    pic. Th ctact d t cti pply-

    i cmt d th ctact. Th vmt

    tmiatd th ctact ca ad btaid

    th qid qatiti m ath c at a

    btatially icad ct. Th bad amdth tmiati ad atd th vmt it

    icad -pcmt ct, dtmiich a pic vaiac t b withi th a i

    which pvi ct had did li.59 evxtm ica a hih a 400% i dictct cmpt th ctact, i th abc

    a pic calati cla, hav b d tb icit t mit li.60

    Lack o Foreseeability/Assumption

    o Risk

    It i th hwi lack ability ma-

    datd by th qimt abv that may p

    th att hdl ctact ki lid t th impact makt vlatility thimatial ct. Th ct hav vwhlmily

    jctd claim li d t pic calati th bai ability ad ampti th ik. Th t-citd ai Jd P

    i th NIPSCO ca i typical th cfati th tw ccpt i th ca xd-pic

    ctact.61 I NIPSCO, th tility ht libad p it c maj cla, cmmcial

    impacticability, ad tati, ai that a

    xpctd vmt li had dd itl-tm pcha ctact cal ptabl

    d t ica i cal ct. Th ct jctdach th claim bad i la pat p th

    dal d ability ad ampti th ik, ad ccldd that th mal [hc

    abl] ik a xd-pic ctact i thatth makt pic will cha ad a xd pic

    ctact i a xplicit aimt th ik makt pic ica t th ll ad th ik makt pic dca t th by62

    Th al icliati th ct t dthat th vy at a xd pic ctact c-

    titt a implid ampti th malik makt vlatility al p a iicat

    impdimt t li. ev wh damatic ma-kt ica a th lt wld-wid cii,

    th vy tity ch vt may dthm abl i th y th ct. I

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    th eat Aili ca th 1970, th ct

    dtmid that th cd wa plt with

    vidc a t th vlatility th Middl eat

    itati ad it cla impact th il makt

    at th tim th ctact wa xctd.63 Th ct

    wt th, tati that v i th abc ch vidc i th cd, it wld b jtid

    i taki jdicial tic th ca ch

    vlatility, di thm th abl ad

    t ctitt ik amd by gl.64

    giv th hihly pblicizd at tday

    vlatil ctcti matial makt, c-

    clly ai that th -ccc

    v xtm, apid ica i th pic

    m matial i a baic ampti p

    which th ctact wa bad p a chall bth matial ppli ad ctact. A

    ca ivlvi th ct tl cii pv

    thi pit.65 I Chainworks, Wbc accptd a

    pcha d t pply Chaiwk it cal-

    da ya tl tbi qimt bad p

    xd it pici. D t th damatic i i

    th makt pic tl i aly 2004, Wbc

    ilatally impd it matial pic ica

    p Chaiwk. Chaiwk wa cd t

    pay th icad pic thh th d th

    ya a a cditi Wbc hi it pplycmmitmt. It lat dcd it lat paymt

    t Wbc by th aat th xta cha.

    Wbc d th balac, claimi, am

    th thi, that it wa titld t pa th

    pic ica bca makt c-

    diti dd it pmac impacticabl

    d th iial ctact.66 Th ct, bad

    p p la m tl ppli id

    bii i Dcmb 2003 (th am mth

    th pcha d id) dcibi ct

    vlatility i th tl makt, a pct tmi th makt, th impiti cha, tc.,

    d that th pati kw that th tl makt

    wa vlatil ad that a ica i aw matial

    ct wa abl.67

    A ctd i th pvi cti thi

    Aticl, th ca ad maitd th ct

    ac th bad ica i baic ctcti

    matial a wll kw via ctact xpi-

    c ad idty pblicati. Whil th pic

    ctai matial may mdat v tim, a a

    whl thy a t likly t abat aytim .

    P that th ccc iicat pic

    calati wa a baic ampti th ctactd th cicmtac will b challi.

    Additially, iv th act that i bildi

    ctcti ctact a ppd t pply

    ctact, idividal matial cmpt

    pt ly dict apct a bad

    ctact, v th xtm pic ica -

    cd ali a likly t pdc acial

    cqc v a t atiy th qi-

    mt that thy d th ctact cmmcially

    l. Th ath t that all pati i

    th ctcti idty wld b btt vd

    t pactivly add th ik ad hw thy

    hld b had ath tha ly p a ct

    at th act dtmiati wh th v-

    hiti li will all.

    IV. Tools or Mitigating and Sharing

    Escalation Risks

    ev i taditial ctact cla ad qi-

    tabl picipl law a t likly t pvid -li t ctact, bctact, ad ppli

    acd with xd-pic ctact ad iicat

    matial pic calati, th ctact cmm-

    ity i t witht th pti i dali with

    matial pic calati ik. I apppiat

    ca, m th llwi may b -

    l tl w, ctact, bctact,

    ad ppli.

    A. Bid Contingencies and ContractAllowances

    Taditially, ctact, bctact,

    ad ppli hav mplyd ctici i

    thi bid a a hd aait may ctcti

    pjct ik. Abt a pic calati cla i

    th ctact, m th mthd hai

    calati ik with th w th i th

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    chai ctact pivity, hidd bid cti-

    ci may cti t b mplyd. Th ik,

    c, m ch bid ctici i twld:

    1. I viw th damatic pic pik

    v th lat th ya, will th bidcticy b adqat?

    2. I th bid cticy i iiicat

    h t pvid adqat ptcti,

    will it lt i a bid pic t hih t b

    accptd by th w?

    Ath, phap btt, appach may b

    th tablihmt a calati allwac

    li itm i th ctact. sch a allwac

    cla diat th matial pic ica

    which th allwac ca b d, ad pvidaad idtiyi th iial bid pic

    ad actal pic paid matial. Th a

    may vaiati th tct ad pati

    ch a cticy cla. Th allwac

    amt miht v a a pp limit t th

    ctact ability t cp aticipatd pic

    calati ct, th ctact miht titl th

    ctact t qt ad civ a cha d

    lai a allwac itm. Th advata

    ch a allwac cla, th w, ad i

    th cla i tablihd a th maximm ct

    ica availabl t th ctact, i th ability

    th w t bdt pic calati ad

    th ctaity that th calati will t xcd

    a tablihd amt.

    B. Value Engineering or Substitute

    Materials

    Th hih ct cpp ha cd m w-

    ad ctact t ach altativ ma-

    tial. Althh tail tl pipi ad PeX

    (c-likd plythyl) a pibl cpp

    pdct btitt, th matial al a p-

    tlm-bad pdct ad bjct t calati

    p thi w. Th i talk i th id-

    ty almim wi maki a cmback a a

    cpp btitt, bt may matial btitt

    pt i thi w, icldi th ik

    that th ctact bctact will t hav

    iicat xpic with a btitt matialad th lai cv w matial almay add t th ct.68

    C. Early Material Purchases

    Whv pibl, calati ik ca bmiimizd by th aly pcha matialbjct t iicat calati. o c, ch

    aly pchai pactic qi aly cpditi i th di dcmt. I additi,ct ta ad iac (ad phap,

    dbl hadli) mt b actd it ay ct-bt aalyi.

    D. Early Material Supply Commitments

    eMCor gp, Ic. nwalk, Cctict,

    th ati lat lctical ad mchaicalctact, ha appachd pic calati ikwith a ivativ tl: la pjct, eM-Cor will t by th cpp b th w

    lct a ctact; i eMCor i t lctd a abctact, thy will imply pply th cpp th pjct.69 I d mt ctact t

    lck i a matial pply pic, thy mt hav a

    aly ctact cmmitmt m th w. Fmth w ppctiv, thi ma ht bid

    valati pid ad qick ti-plliwith pct t th al ctact awad.

    E. Early Involvement o SpecialtyContractors

    I d t accmplih th val i-i aly pply pic lck-i bjctivmtid abv, w mt t pcialty

    ctact (.., tl, cct, mchaical, adlctical) bctact ivlvd aly i thpjct. Havi pcialty ctact paticipat

    i th vlti th pjct di will allwthm t pvid ipt pic-avi ma,t a ali ap th cp th wk,

    ad ivlv ky ppli aly i th pic-t-ti dici. F xampl, tl abicatmit tl pici laly, ad th aly

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    ivlvmt a tl abicat with th di

    ad ctcti tam ca lad t hlpl cm-mdati adi th pici ctai tlmmb, tl mmb availability, ad th

    ct-avi tati.70

    F. The Use o Surcharges

    Ctact pvii pvidi cha

    l ct alady a i i m matialpply ctact ad i ctcti ctact.

    Althh typically limitd t l-ly cala-ti, pvii ch cha i ctctictact d attmpt t add apct

    matial pic calati acti th idty.

    G. Favorable Force Majeure Clauses

    Althh mt c maj cla a t

    citly libal t accmmdat th impact matial pic calati, th badi a c maj cla may b ai t ti-

    at tha th icli a w pic calaticla. Libalizd c maj cla may, at

    a miimm, pvid a ctact bctac-t with a tim xti i th ac matialhta pchai dlay cad by adical

    pic ica. A m avabl c majcla miht al pvid a ctact bc-

    tact with titlmt t a qitabl ctactadjtmt (.., tim ad my) acct th cqc pic calati. A pitd

    t ali i thi aticl, hwv, mt cmaj cla ctmplat ctact lily aticipatd abl

    cicmtac.71 I tday ctcti wld,ad abt m mdicati t th tadad

    c maj cla, it may b diiclt t

    dmtat that matial pic calati waabl.

    H. Delay the Construction Project

    Althh ttim impactical, ad alwayiky, ath pibl tactic dali with

    pcdtd matial pic calati i thdcii t dlay th pjct ad hp a

    m avabl matial pic vimt

    dw th ad.

    I. Flow Down the Risks

    Taditially, al ctact hav daltwith may ctcti ik by fwi thm

    dw t t allwi thm t b pad p

    mbctact ad ppli. Cally

    catd xd-pic bctact ad pcha

    d that phibit bctact ad ppli

    m hai calati ik with th ctac-

    t w till a cmmplac. Hwv, -

    lik may ik that bctact ad ppli

    taditially hav accptd a pat thi pliht,

    matial calati ik m t hav pawd

    wd bctact ad ppli cadi ctact tiati, althh tatitical

    vidc thi i pa. Th 2006 Ctcti

    Idty Aal Fiacial svy pd by

    th Ctcti Fiacial Maa Acia-

    ti pdcd th lt, bad admittdly

    a limitd ampli ctact, bctact

    ad ppli:

    Fity-ix pct th pdi

    bctact idicatd that thy

    w icld calati cla i thictact. sixty-th pct th -

    pdi al ctact al tatd

    that thy icldd calati cla i

    thi ctact.

    Twty-v pct th pdi

    bctact idicatd that calati

    ct w a bi tatd a a allw-

    ac itm i thi bctact.

    Twty-tw pct th pdibctact idicatd that thy add

    l cha t thi pici aa-

    mt.

    nit pct th pdi

    bctact idicatd that thi b-

    ctact a chad a a lt

    calati ik.

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    o th da attmpti t c p-

    pli ad bctact t ba all th ik

    matial calati i th pibl dalt

    a bctact ppli aci a m

    matial pic ica. Th, i thi i th ap-

    pach t matial calati tak by a w al ctact, p-qalicati th b-

    ctact ad ppli acial tth,

    th pmac bd, bth, bcm

    m iicat cidati.

    J. Bulk Material Purchases and

    Supplier Partnerships

    Althh t apppiat i all cicmtac,

    whv pibl, a hd aait matial

    pic calati may b achivd by byi ma-tial i blk, pcially i th matial ca b

    tilizd m tha pjct. sch blk

    pcha may lt i btt matial pic,

    althh ta, hadli, ad iac ct

    al mt b tak it acct. Blk pcha

    may b pat a pc by which a ctact

    bctact k t tablih a cl wki

    latihip with pd ppli. I a p-

    pli kw that a ctact bctact

    ca aat pat bi with th ppli,

    ad a cit vlm bi, th bttpici tm a pibl.

    K. Material Escalation Clauses

    With icai qcy, th ctcti

    idty i mplyi matial pic calati

    cla i th t t ctl, ad ha th ik

    , vlatil matial pic. Th tct ad p-

    ati th matial calati cla vay

    atly. sm calati cla attmpt t tack

    th actal mvmt matial pic m thbid amt t th a-dlivd pic. sm a

    did t fct thtical pic mvmt

    bad vai idty ct idx. oth

    fct vaiati th tw appach t

    mai pic vlatility.

    I th paaaph that llw, m th

    m cmm, ad cmm, pic adjt-

    mt cla a dcibd. T ait th ad i

    dvii a calati cla, w hav icldd

    cmmt th ctal at m

    th m ppla pic adjtmt pvii.

    I additi, w ti i that

    hld b cidd i mplyi ay picadjtmt cla.

    The AGC Approach

    I th ac th damatic tl pic cala-

    ti i lat 2003 ad aly 2004, th Bad

    Dict th Aciatd gal Ctact

    Amica (AgC) adptd a lti i Mach

    2004 that calld th icli qitabl

    adjtmt cla matial pic ica

    i xd-pic ctact bi lt by pblic ad

    pivat w. I May 2004, th AgC C-

    tact Dcmt Cmmitt mvd qickly t

    dvlp a ppd, tadadizd amdmt

    t th AgC xd-pic w/ctact a-

    mt. Thi ppd ctact amdmt (AgC

    Dcmt n. 200.1, Amdmt n. 1, P-

    ttially Tim ad Pic-Impactd Matial.)

    wa did t tablih Bali Pic

    matial idtid by th pati a pttially

    tim ad pic-impactd, ad t pvid amthd adjti th ctact pic a a lt

    fctati i th bali pic. Th ky

    at th AgC pic adjtmt pvii

    a wth ti:

    Pic Ica ad Dca. Th

    cla allw pwad ad dw-

    wad pic adjtmt.

    spciid Matial oly. Th cla

    qi that th pati pciicallyidtiy th matial which may b

    bjct t adjtmt.

    Bali Pic. Th cla madat th

    pati amt a bali pic

    ach matial diati, a wll a

    a pici adjtmt mthd ach

    matial caty.

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    n Dalt ecalati Ma. Th

    cla ctmplat that th pati

    may a a matial pic ct idx

    appach t calati, bt th adjt-

    mt mthd i lt t th pati, with

    dalt mthd pvidd.

    Ctact Adddm. Th amdmt i

    itdd t b xctd ctmpa-

    ly with th xcti th iial

    ctcti ctact.

    ntic. Th cla titl ith paty t

    tiy th th a bai a pic adjt-

    mt, ad pvid that th tic hld

    b pvidd withi 30 day m th dat

    th bai a pic adjtmt ai.

    sppti Dcmtati. Th -

    qti paty mt pvid apppi-

    at dcmtati btatiati ach

    pic adjtmt qtd.

    n Mak-up. Pic adjtmt cat

    icld ay vhad pt mak-p.

    n rtactiv Adjtmt. n p-

    wad dwwad pic adjtmt

    i apppiat with pct t matialdlivd b th dat th qid

    ticati.

    Maximm Limit. Th cla mak

    pvii amt a maximm

    limit (by pcta th iial c-

    tact pic) th aat ica

    dca i bali pic.

    Tim exti. Th cla al pvid

    th pibility a tim xti

    d t dlivy dlay, matial -availability, i byd th ctl , ad

    witht th alt , th ctact, it

    bctact matial ppli.

    It i diclt t dtmi th xtt t which

    th AgC Dcmt n. 200.1 i actally i

    i ctcti ctact. Ctaily, th cla

    fct a lical appach t matial cala-

    ti, ad it m likly that th AgC appach

    ha b itctiv i th cati th

    pic calati pvii i pblic ad pivatctact. oth ppla tadadizd idty

    ctact (i.., th ctact m pblihd by

    th AIA ad DBIA) hav t icldd calatipvii i thi tadad amt pb-lihd m. similaly, althh w diti

    th tadadizd idty m pblihd by

    th Amica Ititt Achitct (AIA) adth ei Jit Ctact Dcmt Cm-

    mitt (eJCDC) a d t b pblihd i 2007,

    plimiay dat th AIA dcmt d tctai a matial calati cla.

    The Federal Governments Approach

    Th Fdal vmt ha a l hitytha th pivat ct with pic calati p-

    vii. sch cla hav b cmm i may

    pblic wk ctact ptlm-latdpdct, icldi aphalt, m pid

    tim. Pic calati pvii w a pmit-

    td by th Fdal Acqiiti rlati (th

    F.A.r.) i all xd-pic amt, wh thvmt Ctacti oc dtmi,

    di th p-licitati ta, that th

    a calati cla i apppiat.72

    Th F.A.r. tablih th Ctacti ociht t pvid, i xd-pic ctact, pic

    adjtmt cla th al typ.73 I

    d t icld pic adjtmt cla ixd-pic ctact, th Ctacti oc, i

    th p-licitati pha, mt dtmi that:

    (i) Th i i dbt cci th

    tability makt lab cditi

    that will xit di a xtdd p-

    id ctact pmac, ad

    (ii) Ctici that wld thwi

    b icldd i th ctact pic ca b

    idtid ad cvd paatly i thctact.74

    nmally, pic adjtmt allwd by

    th F.A.r. a tictd t th which a a

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    cqc idty-wid ctici

    ad t ctici byd th Ctact

    ctl.75 Th F.A.r. pvid tadad ec-

    mic Pic Adjtmt cla with

    adjtmt bad actal ct76 ad

    adjtmt bad tablihd pic.77 Thtatty cla may b mdid by icai

    th aat 10% limit ica, bt th-

    wi th qid cla mt b btatially

    th am a th tatty cla.78 Th F.A.r.

    allw, bt d t pvid a qid -

    td cla , pic adjtmt bad

    ct idx.

    Th tial at th F.A.r. ecmic

    Pic AdjtmtLab ad Matial cla

    bad fctati i th actal ct labad matial a a llw:

    Pic Ica ad Dca. Th cla

    pvid bth lab ad matial

    ica dca.

    ntic rqimt. Th ctact

    mt tiy th vmt withi 60

    day at ay ch ica dca,

    ad t lat tha th dat al pay-

    mt.

    sppti Data. Th tic mt i-

    cld th ppd pic adjtmt a

    wll a ppti data xplaii th

    ca, ctiv dat, ad amt th

    ica dca.

    uit Pic Matial oly. With pct

    t matial calati, th cla i

    limitd t th matial which

    th a it pic tablihd i th

    ctact.

    exmpti F Dlayd Dlivi. n

    pwad adjtmt i allwd mati-

    al vic qid t b dlivd

    pmd b th ctiv dat th

    adjtmt, l th ctact ail

    t dliv pm accdi t th

    ctact chdl i a xcabl dlay.79

    Miimm ecalati Thhld. n

    adjtmt i allwd i th t cha

    wld b l tha 3% th th-c-

    t ttal ctact pic.80

    Maximm Limit. Th aat allica cat xcd 10% th

    iial matial it pic, l th

    10% limitati ha b mdid i th

    ctact.

    Limitl Pic Dca. Th i

    pcta limitati th amt

    dca that ca b mad d th

    pic adjtmt cla.

    Adit riht. Th vmt tai th

    iht t xami th bk ad cd th ctact th ya at th

    dat al paymt.81

    Th D Fdal Acqiiti rlati

    spplmt (DFArs) al icld tadad

    cla i addi pic adjtmt

    tl, almim, ba, bz, cpp mill

    pdct (DFArs 252.216-7000) ad -ta-

    dad tl itm (DFArs 252.216-7001).

    Public Contract Clauses

    oth pblic bdi, icldi tat ad m-

    icipal w, hav b l p t adpt

    pic adjtmt cla i thi ctcti

    ctact. I additi t th l-hld ti that

    ctact a i th bt piti t aticipat,

    ad am th ik , matial pic calati

    i thi pblic ctact bid, pblic w al

    hav diclty mayi pic adjtmt cla

    with p-dtmid bdt limit. Hwv,

    th i pcdt , ad m hity with,pic calati cla i pblic ctact.

    F xampl, hihway ctact hav b

    th idty mt hit had by ca-

    lati matial pic. Th ct liqid aphalt

    pavi, cmt, l, tl, ad th matial

    vital t hihway ctcti pjct hav

    kycktd i th lat th ya. I additi

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    t hih y ct, pic calati i th

    taptati idty al ha b ld by

    clidati i th hihway idty (.., a

    dcti i th mb pim ctact,

    qay whip clidati, tc.), by la

    taptati ctcti pam, by thdwizi th ctcti wkc a a

    lt th itability taptati di

    pi t At 2005, ad by lcalizd matial

    hta82 m ctcti pdct.83

    I th stat Wahit, xampl, th

    Wahit stat Dpatmt Taptati

    ctcti ct idx icad 31% i th t

    tw qat 2006 a cmpad t th aal

    ava 2005. Ht mix aphalt ct al

    33% i th t tw qat 2006, accdit th Wahit DoT ct cd.84 T pt

    thi i ppctiv, cid that th ava

    aal wth at th Wahit DoT

    ctcti ct idx m 1990 thh 2001

    wa appximatly 1.5% p ya; ic 2001, th

    ava wth at ha b 12% p ya. simi-

    laly, th pic tl ba d i Wahit

    DoT taptati pjct icad by m

    tha 100% btw Jaay 2002 ad octb

    2004.85 Th ctcti ct idx maitaid by

    th Fdal Hihway Admiitati (FHWA),althh cmpd lihtly dit matial

    ad dit c, hw a imila piki

    hihway-latd matial pic i ct ya.

    Th Amica rad & Taptati Bild

    Aciati pt that, ic 1998 ad thh

    2005, th ct matial hihway ad tt

    ctact icad 35.1%, a cmpad t a

    19.8% ica i th cm pic idx.

    A a lt, th u.s. Dpatmt Tap-

    tati Fdal Hihway Admiitati, ad

    tat DoT ac th cty, hav dtak

    a mb ma t hlp allviat th pb-

    lm cad by thi pcdtd calati,

    icldi th cati vai pic adjtmt

    mchaim hihway ctact. Th Fdal

    Hihway Admiitati th u.s. Dpatmt

    Taptati id a tchical adviy

    ti pcd th dvlpmt ad

    pic adjtmt cla i hihway c-

    tact.86 May tat DoT hav implmtd pic

    calati ma, althh th appach

    tak by th tat DoT vay i itti way.

    Bca th appach may b t c-

    tact, ppli, w, ad thi cl ith cati pic calati cla, w will

    dcib m th cmpt tw th

    pic calati appach.

    The Virginia DOT

    I lat 2004, th Viiia Dpatmt Ta-

    ptati implmtd a pcial mthly pic

    adjtmt mchaim tl d pcic

    itm idtid wk. Th VDoT pvii

    pll t, i at dtail, th mla t b ap-plid i dtmii ctact liibility a

    tl pic ica dca.87 Itti a-

    pct thi tl calati pvii icld:

    ealy stl od. T b liibl a

    pic adjtmt, th ctact, b-

    ctact ad/ ppli a qid

    t plac a pcha d liibl

    tl itm withi 30 day at xc-

    ti th VDoT ctact.

    spcic Idticati eliibl Mati-

    al. oc hippd t th abicat, th

    tl itm a qid t b pcically

    td, labld, tad, cizabl

    by cl maki ad idtiabl by

    pjct ipcti ad adit vica-

    ti.

    P Bid Pic. Withi 15 day at

    th ctact awad, th ctact i -

    qid t bmit matial pic qt,bid pap, th dcmtati

    atiacty t VDoT th bid itm

    which a tl pic adjtmt may

    b qtd.

    Ava Pic Dcmtati. Th

    pt-awad dcmtati bmittd

    by th ctact mt b adqat t

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    cmplt a VDoT m tablihi th

    ava pic p pd th liibl

    tl bid itm.

    Cticati Bid Imati. Th

    ctact mt ctiy that all p-pti dcmtati i iial adwa actally d i cmpti th bidamt liibl tl itm.

    Matial Pic ecalati oly. n cala-ti i allwd tl abicati, hip-pi, ta, hadli, cti.

    Miimm ad Maximm ecalatiLimit. A liibl tl pic ica dca mt b i xc 10%,

    p t a maximm 60%, m thtablihd ba pic, wh cmpadwith th latt pblihd pic idx ict wh th matial i hippd tth abicat.

    Diti Ctlli Pic Idx.Th pic calati pvii pcith Ba Lab statitic PdcPic Idx t b d ach caty tl matial, qii a ava tw idx with pct t ctai tlmatial.

    excldd Dlay Dama. Althhdlay d t tl hta may jtiya ctact tim xti, thy will tb d claim tadby qip-mt, xtdd c vhad, thct aciatd with ch dlay.

    The Florida DOT

    Th Flida DoT tak a mwhat ditappach t matial pic calati. Th Flidahihway pcicati pvid pibl piccalati with pct t l ad bitmimatial d i hihway ctcti pjct.ui th bitmi matial calati p-vii i th Flida hihway pcicati aa xampl, cid th llwi ittiat thi pic calati mchaim:

    Miimm Ctact Timam. ecala-

    ti iht attach ly t ctact hav-

    i a iial ctact timam

    m tha ya, m tha 5,000

    t aphalt cct.

    Pic Ica Dca. Th cala-

    ti pvii tak it acct bth

    ica ad dca i pic.

    Idx-Bad Pic Adjtmt. Th

    pic adjtmt a bad vaia-

    ti m th Aphalt Pic Idx (API)

    bitmi matial. Th Flida

    DoT dtmi th API ach mth

    by avai qtati i ct th

    t day th mth at all tmial

    that cld aably b xpctd t

    ih bitmi matial t pjct

    i th tat Flida.

    Mthly Adjtmt Dtmiati.

    Th Flida DoT cmpa, a mth-

    ly bai, th ct API with th API

    pvaili i th mth wh bid w

    civd, ad allw pic adjtmt

    wh th ct API vai by m

    tha 5% th API th mth wh

    bid w civd.

    Madaty Adjtmt. Th API-bad

    pic adjtmt i madatyth

    ctact i t iv th pti

    accpti jcti th adjtmt,

    ad ctact tic i qid t

    iitiat th pic adjtmt.88

    F ppli, ctact, ad w i

    ach ivativ appach t matial pic

    calati pvii, th vai calati

    pvii mplyd by th tat dpatmt

    taptati a wthy cidati. Thu.s. Dpatmt Taptati Fdal Hih-

    way Admiitati wbit89 pvid d

    imati matial pic calati act-

    i hihway ctcti, a wll a m vy

    l lik t th tatmt matial pic

    calati by vai tat DoT.

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    L. Index-Based Escalation Clauses

    May th calati cla bi c-

    td i th maktplac a pmid ma-

    abl cha i ctcti ct idx

    vai ctcti pdct. Th liac ctcti idx i dmd pabl

    by may w ccd abt thi ability

    t dtmi ad t viy actal pic ica

    which a w hld ha m p-

    ibility. nt ly d ct-bad idx imp

    additial admiitativ ad adit cti

    ctcti w, bt th mai a halthy

    lvl kpticim am w with pct t

    th pttial maiplati ctcti ct

    by ctact, bctact, ad ppli.

    National Construction Price Indexes

    Ctact, bctact, ad ppli

    qtly pp ctact calati pvii

    bad p vai atial pic idx. F

    xampl, th uitd stat Dpatmt Lab,

    Ba Lab mthly pblicati titld

    Whlal Pic ad Pic Idx, pvid

    mthly pic imati vitally all c-

    tcti matial ad ppli.

    sic 1986, th Ba Lab statitic

    (BLs) ha b pblihi idx that ma

    cha i th pic matial ipt t th

    ctcti idty. Withi th Pdc Pic

    Idx (PPI) amily idx, th a val

    maj claicati ytm, ach with it w

    hity, , ad tct.90 Th PPI idx will

    t icld ay ct th by ic byd

    th pdc ladi dck th pit

    al xampl, it will t icld iac,

    iht, ta, abicati, itallati ct.Th i PPI ctcti lab, ad th

    PPI tcki ad iac a t pcic

    h t idicat th pcializd vic ad

    pdct d i ctcti. All th PPI i-

    dx a bad p pic at a atial lvl.

    A a lt, thy may acct ial lcal

    pic dic.91

    sic 1995, th BLs ha ptd PPI tim i

    data, w la, ad tchical matial at

    it wbit (www.bl.v/ppi). Th PPI wbit

    pmit t dwlad aly all ct

    ad dictid PPI tim i data.92 Th PPI

    la a id typically i th cd thid

    wk ach mth. sm PPI data i a-

    ably adjtd t limiat th ct cha

    that mally cc at abt th am tim ad

    i abt th am maitd ach ya. Hwv,

    it i th adjtd vi PPI data that

    a th pimay cmpt pic calati

    cla. Ad, th adjtd PPI data i tily

    bjct t vii ly c, mth at

    it iial pblicati, t fct lat pt ad

    ccti by cmpay pdt.93

    Th AgC Chi ecmit, K sim,

    athd a AgC Ctcti Ifati Alt

    i sptmb 2006, ad thi pblicati p-

    vid a walth imati adi th

    hity, at, ad ct idx acti

    th ctcti idty. M. sim al i-

    cld i thi Alt a liti th Pdc Pic

    Idx which a blivd t b th clt ap-

    pximati t itm actally d bht

    ctcti. A M. sim pit t, m

    th PPI pblihd by th BLs ad th c-

    tai a wid a matial tha th pci-

    cally d i ctcti pjct. F xampl,

    th PPI tl mill pdct (diatd

    a WPu1017) al icld tl d i mt

    vhicl, appliac, qipmt ad lwh,

    i additi t tl d i ctcti. o th

    th had, th BLs PPI cct pdct

    (diatd a WPu133) icld matial d

    lly i th ctcti idty. Th lt b lad h: b mplyi a matial

    pic calati cla bad a pblihd pic

    idx, mak ctai that y dtad th

    pdct, ad th pici imati, icldd

    i a paticla PPI, ad that th ch idx i

    th mt apppiat mai th cala-

    ti which i th c y ctact cla.

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    ENR Cost Indexes

    Ath qtly-d c pici

    imati calati cla i th amily

    idx pblihd by eii nw-rcd

    (enr), a ctcti idty pblicati th Mcgaw-Hill Cmpai. enr pblih

    bth a Ctcti Ct Idx (CCI), a wll a

    a Bildi Ct Idx (BCI), ad bth a d

    widly thht th ctcti idty.

    Th enr pic idx a bad ima-

    ti athd by pic pt cvi 20

    diatd u.s. citi.94 Bth th CCI ad th BCI

    idx hav a lab cmpt. I th cd

    wkly i ach mth, enr pblih th

    CCI, BCI, matial idx, killd lab idx

    ad a cmm lab idx th 20 lctdciti, a wll a a atial ava bad th

    20-city pici imati. Th t enr i

    di ach mth ctai a idx viw

    th atial idx th latt 14-mth p-

    id. Di ach th wkly i enr

    ach mth, m dtaild idx imati i

    pvidd th vai cati ctc-

    ti matial.95

    Th enr pic a bad pic qt

    m diatd ppli i ach city, a wlla m lcal i wa at. Th idx d

    t ma ct ditial btw citi;

    thy ma ly th td i a idividal city

    ad i th u.s. a a whl. Th idx a t

    aably adjtd ad, enr pblih 20-city

    ava i a idx which it cmmd a a

    m apppiat ma ct calati.96

    Th a th pblih ctcti--

    latd ct idx, ad, a pvily mtid,

    m pivat ad pblic w (.., vai

    tat DoT) hav catd, ad ly xclivly

    , thi w matial ct idx. Ky t th

    ccl applicati a idx-bad cala-

    ti cla i th pati ll appciati

    th apppiat th paticla idx

    a paticla ctcti cmmdity, a ll -

    dtadi th ma i which th idx-

    bad pvii pat, ad cal dati i

    d t claly implmt th pati calati

    xpctati.

    Th pati ail t ccl achiv thth al i vidt i may ca. F xampl,

    iJohn T. Oxley, et al. v. Oklahoma Gas and Electric

    Co., et al., 97 th oklahma Ct Appal, wa

    acd with a ctact calati pvii whichwa pmid th aa pic atal a

    a tablihd, m tim t tim, by th FdalPw Cmmii. utatly, di th

    tm th pati ctact, C catdth Dpatmt ey ad th Fdal e-

    y rlaty Cmmii, ad th FdalPw Cmmii cad t xit. Th ct

    jctd th by amt that, wh thtity tablihi th pic idx cad t x-

    it, th ll iht t calati al cad.Itad, th ct ctd th ctact t iv

    ct t th mtal itti th pati, adth d that thi mtal itti wa

    th pidic calati atal a al picbad th i aa makt at, v i th

    Fdal Pw Cmmii wa l avail-abl t tablih that at. I th ca, ct

    hav tld with zzy ctact diti th xact mlaic pati idx-bad

    calati cla.98

    I xpic, patia mtim vy lppy i thi appach

    t matial pic calati cla, pciallyth bad pic idx. rlyi a ct

    t d th pati itti with pct tth pati a calati pvii i t a

    diabl lt.99

    M. Cost-Based Escalation Provisions

    Bca a idx-bad calati cla maylt i a thtical matial pic ica

    dca that ba latihip t th actalct xpic th ppli, bctact,

    ad ctact a paticla pjct, ctact-i pati mtim pt a ct-bad

    calati aamt. sm ct-bad claa imply tatd100 ad littl m tha libal-

    izd c maj cla, lavi iicatdtail th implmtati th cla t b

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    wkd t by th pati dd by a ct

    abitati pal. oth a dtaild, lavi

    littl aid, bt mtim alami i thi

    lth ad cmplxity. Th a ct-bad

    calati cla al i mtim th pdct

    amiliaity with, ditt , th vaimatial ct idx ppd by m

    th ctacti pati. I ay vt, ad al-

    thh a ct-bad calati pvii al ha

    diadvata,101 m dici ct-bad

    calati aamt i apppiat.

    I a w itd t tiliz a actal ct-

    bad calati pvii, it i td that

    th aamt icld at lat th llwi

    tial pic:

    Adqat dcmtati (.., ppliqt ad dtaild bid bakdw)

    tablihi th ba pic th ap-

    plicati th calati pvii.

    Dcmtati (.., additial p-

    pli qt) tablihi that th ba

    pic i, i act, a aabl pic.

    A ctactal bliati that th c-

    tact ad bctact immdiatly

    (withi a pcid timam at c-tact awad) plac d ay mat-

    ial itm bjct t calati.

    Ctact laa xcldi m th

    calati cla pati ay pic -

    calati aciatd with lack dilic

    by th ctact, bctact, p-

    pli, with th dlivy th matial

    at th chdld dlivy dat.

    sw cticati by th ctact

    th accacy , ad actal liac ,th matial pic i th bid, ad th

    accacy ctact ptati

    adi th actal matial ct.

    Pmpt tic qimt.

    excli vhad ad pt mak-

    p th pic calati.

    Adqat aac that th ctac-

    t pic d t icld a hidd

    calati cticy.

    A ytm idtiyi, ad tack-

    i thh th abicati dlivypha, th pcic matial bjct tcalati tm.

    Ctaily, a w cld mply a mb th pti i tcti a ct-bad -

    calati pvii (.., a maximm calati

    limit, a tw-way cla pati, tc.), bt th

    cmpt idtid abv a damtal

    at, m th w ppctiv, ayactal ct-bad calati pvii.

    Th xtt t which pblic ad pivat w- will mply matial pic calati cla

    i ctcti ctact i ctai. Ctaily,

    it cat b xpctd that pic calati

    cla will b adptd a a tadad l-tm

    plicy all ctcti pjct. Mt pblicaci mplyi calati pvii c-

    ti t pidically mit th tility ch

    cla, a wll a th impact th cla

    th pblic pcktbk. still, acd with dcli-

    i mb bidd m pjct ad

    hih bid pic, with th lti that ptpd caclld pblic impvmt,

    pic calati cla cti t b mplyd

    by may pblic aci ad t b cidd

    by th.

    V. Checklist o Practice Pointers

    Di th lat ix mth, th ctcti

    idty ha m ai matial pic

    calati with ctai ctcti matial.Th ct lwdw i th idtial hi

    makt, a wll a icad impt ad la

    dmtic capacity, may a m calati

    p. Cct pic hav lvld t, ad

    lmb ad plywd pic hav xpicd

    a adal dcli di 2006. still, l picmai hih ad will likly cti t d . A

    a lt, aphalt pic a likly t mai hih.

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    Cpp al i likly t mai at a lvatd

    pic lvl. stl ad cct ct a had

    t pdict.

    T ait th ctcti idty xctiv

    th lal pactiti i dali with th c-

    qc matial pic calati i thi -

    ctai t, w th llwi chcklit

    pactical tip. W hav bdividd th chcklit

    i d t ti m th ppc-

    tiv th w, ctact/CM, bctact

    ad ppli.

    A. Practical TipsThe Owners

    Perspective

    I y mply a matial pic cala-ti cla, pvid that th cla will

    ti bth pwad ad dwwad

    adjtmt.

    Cid a calati cla which

    pvid a miimm lvl calati,

    blw which th ctact will am

    all ik, a wll a a maximm limit

    allwabl calati.

    Ath vaiati t th mplymt

    limit calati ad calaticla i th ik hai

    pviii.., th ctact ad

    w ach ha a ctai pcta

    ay liibl calati, phap

    a lidi cal.

    I i a calati cla bad

    actal pic ica v bid amt,

    i that th ctact i qid

    t ih adqat p th pic

    lid i th bid, ad p (..,mltipl qt) that th pic i th

    bid a aabl ad citt with

    makt pic.

    Cid th pttial advata

    a di-bild ctact aamt,

    wh di ad bild cl-

    labat aly dcii which may

    act matial chic ad dlivy

    chdl.

    Ivlv pcialty ctact (.., tl,

    lctical, mchaical, ad cct

    bctact ad ppli) i thaly ta th pjct dvlp-

    mt, that y ca bt m thi

    idac adi matial pic ad

    hta.

    I y itd t hav th ctact ad

    bctact am all th ik

    matial pic calati, p-qaliy

    ctact ad bctact th -

    acial tth cay t withtad

    matial pic pik whil ctiit pm.

    I y itd t hav th ctact ad

    bctact am all th ik

    matial pic calati, cid

    th pibl tilizati pmac

    bd.

    A y ctmplat qii ctac-

    t ad bctact t am all

    matial pic calati ik, cid

    th pibility that y pjct ctwill b hih, a a cti hidd

    ctici, bd pmim, ad

    pttial pjct dlay dipt.

    I y tiliz a matial ct calati

    cla, ad it i idx-bad, mak c-

    tai that y lly dtad th at

    ad lvac th pcid idx, a

    wll a th mchaic th ma i

    which th idx will b mplyd.

    I y pic calati mchaim

    ivlv a cmpai bid pic t

    actal pic, icld adqat adit

    iht i y ctact.

    I y mply a pic calati cla,

    limit it pati a t xcld th

    impact calati lati t ay

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    dlayd ctact di matial dlayd pmac wk.

    Cid limiati matial piccalati cla i ctact ht

    dati, wh th i a at likli-hd that th ctact, bctact,ad ppli ca lck-i aticipat

    matial pic.

    A calati cla miht cid th a calati dad zi..,th t w mth th pjct pid

    a calati , ic th ctacthld hav b abl t pic th wkad aticipat calati at lat tht w mth th pjct.

    I y pvid th pibility atim xti a a lt matialhta xtadiay pic hik,xcld th iht t ay ctact bctact cvy th dlay

    dama (.., tad-by qipmt,xtdd hm c vhad, tc.)

    B. Practical TipsThe General

    Contractors or ConstructionManagers Perspective

    I y bctact ppli i-it matial ct calati cla

    i thi ctact, i that y havpa-thh iht t th wadthat th pic calati mchaim iy bctact ad i y ctactwith th w a idtical.

    P-qaliy y bctact ad

    ppli thi acial ability twithtad likly matial pic pikdi th c a pjct.

    Attmpt t t th w amtt allw y t p-pcha, ad tpaid , matial which ca b ddaly ad which may b paticlalycptibl t calati.

    I y a abl t icld a malmatial pic calati cla i yctact with th w, attmpt t

    mdiy th c maj cla t allw tim (at lat) ad my aciatd

    with matial pic calati.

    edcat th w th ct adva-

    ta paatly idtiyi, adpvidi th pibility cala-ti paymt , matial which havb xtmly vlatil i pic. (Thii paticlaly imptat a dalvmt pjct, wh a ctact-

    i c p-bid dcii t acalati cla i cay; bt it al

    hld b a imptat apct yaly ctact tiati with pivatw.)

    Wk with th w t val it achiv pjct ct avi, by lk-i btitt matial which at a vlatil i pic, by achi

    th cmi which will tpibl matial pic calati adhlp ptct th w bdt.

    Cid th pibility blk matialpcha, m tha pjct,ad tablihi ppli pathipwhich may lad t btt pici adt ppli cmmitmt t ypjct.

    Cid th tility mplyictact allwac matial piccalati, that th w ca pl axd calati mb it th iial

    pjct bdt.

    I y a pic calati cla withy bctact ad th w, a allwac itm matial piccalati, i that th mthd

    pcid dmtati th piccalati a idtical p ad dwth chai ctact pivity. I pibl,

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    tct th bctact ad y

    ctact with th w t pvid a

    il dtmiati ay titlmt

    t pic calati, ad t hav that d-

    tmiati bidi th w ad

    y bctact.

    I y aticipat a amt with th

    w adi matial pic cala-

    ti, qi that y bctact

    ad ppli paatly pic th

    matial which will b bjct t th

    calati cla.

    B way w qimt that

    y pvid a gMP aly i th di

    dvlpmt pc, l that gMPcmmitmt al icld ma

    matial pic calati.

    C. Practical TipsThe Subcontractors

    and Suppliers Perspective

    edcat th ctact ad w th

    advata matial pic calati

    pviid it aly.

    Qaliy y ppal t iit a

    mtally-aabl matial pic -

    calati cla.

    Attmpt t cvic th ctact ad

    w th val havi y i-

    vlvd i th di dvlpmt ta

    ad i ay val ii t.

    B way bid qimt that y

    hld p pic lthy pid

    tim.

    B way bctact cla (..,

    pay-i-paid cla) that limit y

    cvy matial pic calati

    t ly th amt, i ay, which th

    ctact ca btai m th w.

    udtad th vai pic idx

    availabl mai matial pic

    calati, ad i that y ch

    th pp idx y matial.

    exami th c maj cla p-

    pd y bctact ad attmpt

    t tiat th iht t tim (at lat)ad my a a cqc mat-

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    VI. Reerences1. Much has been written in recent years on the subject o materialshortages and material price escalation. We draw liberally on the

    eorts o those who have spoken beore us. The materials cited in

    this article should provide a valuable resource or those who look or

    better ways to deal with the ongoing risks posed by material price

    escalation.

    . Consider the ollowing construction material price spikes, as mea-

    sured by the United States Bureau o Labor Statistics, rom June

    o 2005 through June o 2006: asphalt (71.4% increase), gypsum

    products (23.3% increase), copper and brass mill shapes (81.5%

    increase), aluminum mill shapes (17.1% increase), crude petro-

    leum (25.7% increase), cement (14.4% increase), iron ore (17.4%

    increase), iron and steel scrap (73.7% increase), copper base scrap

    (86.1% increase), plastic construction products (19.2% increase),pre-stress concrete products (18% increase), ready-mixed concrete

    (13% increase), and diesel uel (33% increase). These construction

    material price increases, which began to spike in early 2004, ar

    exceed the broad measures o price ination reected in the Bureau

    o Labor Statistics Consumer Price Index or all urban consumers

    (CPI-U) or the Producer Price Index (PPI) or fnished goods.

    . AGCs Construction Ination Alert dated September 2006, reported

    by AGC Chie Economist Ken Simonson.

    . Id.

    . Id. Ken Simonson, the AGCs Chie Economist, oers the ollowing

    two characteristics o the construction industry as contributing to the

    severity o the escalation impacts: (a) Construction contractors typi-

    cally are contractually locked into contracts requiring fxed quantities

    o materials. When supplies become scarce, or more expensive as

    a result o domestic and international market orces, a contractor

    cannot simply build a smaller building or use less material to build

    a roadway. In other industries, the impact o material shortages are

    dramatic price increases will be sotened by, or example, reductions

    in product output; (b) Construction project costs also are particularly

    aected by transportation costs and transportation difculties. On a

    construction project, large quantities o materials must be delivered to

    a specifc site, requently rom great distances. Also, as oil prices rise,

    and uel costs increase, the construction industry eels a signifcant

    impact. For example, in 2004, the market demand worldwide or dry

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    bulk ocean carriers used to carry scrap iron, copper ore and other

    commodities tripled the cost o the ship charters bringing cement

    into the United States, and port and rail yard congestion added to

    the increased costs and resulting delays.

    . Ken Simonson, Sticker Shock Will Stick Around, in the AGCs

    Georgia Construction Today, Third Quarter 2006.

    . In their article published or the American Bar Association Construc-

    tion Forum at its Winter 2006 program, Brad Gordon and David Ratter-

    man oer an excellent recap o the lead-up to the steel shortages and

    price spikes in 2004. Prior to 2004, the domestic producers o steel

    in the United States were, or the most part, meeting the demands

    o the domestic marketplace. With the advent o electric arc urnace

    technology in the 1970s and 1980s, domestic steel producers were

    turning the large inventory o steel scrap available in the U.S. into

    new steel or construction. Steel was being sold to the construction

    industry on the basis o cost based pricing (i.e., as opposed to having

    the market demand set the price, the steel mills were basing steel

    prices on the actual cost o production and a fxed mark-up). Thus,

    prices or milled steel products were set, not at the time the order

    was placed, but as the steel completed, or neared the completion

    o, the milling process. This pricing policy let bidding subcontractors

    and contractors at some risk as they prepared their estimates and

    made contract commitments or steel prices in advance o having

    fxed prices rom the steel mills. Still, the long history o stable steel

    prices rom the mills allowed contractors to successully negotiate

    this pricing risk. At least, that was the case prior to late 2003 and

    early 2004.

    . S. Lewis, Biggest In The World, 2005 Engineering News-Record

    Sourcebook, p. 42, 43-45, December 2005.

    . P. van der Schans, Increasing Material Prices Gouge Construction

    Industry, Construction Executive, January 2005.

    10. Steel Price Set To Carry On Climbing,The Financial Times(London),

    p. 28, January 27, 2004.

    11. B. Gordon and D. Ratterman, Price Escalation, Deaults, PotentialDeaults, and Remedies, American Bar Association Construction

    Forum Winter 2006 Program.

    1. See, e.g., Steel Makers Biggest WorryChina,The Deal, December

    10, 2003; This Is Not Your Fathers Steel Bubble, Fortune, p. 53,

    January 26, 2004; B. Gordon and D. Ratterman, Price Escalation,

    Deaults, Potential Deaults, and Remedies, American Bar Associa-

    tion Construction Forum Winter 2006 Program.

    1. B. Gordon and D. Ratterman, Price Escalation, Deaults, Potential

    Deaults, and Remedies, American Bar Association Construction

    Forum Winter 2006 Program.

    1. Ination Maintains Strong Momentum, Engineering News-Record,

    p. 66, June 26, 2006.

    1. Although the housing market seems to have cooled recently, many

    economists have been predicting a decline in housing construction

    or the last our years; and in each year, the housing industry set

    new high water marks. Some economists still doubt any signifcant,

    long-term decline in residential construction. See Will Construc-

    tion In The U.S. and Georgia Thrive or Dive In The Rest o 2005?,

    Presentation o Ken Simonson, Chie Economist or the Associated

    General Contractors o America, April 19, 2005.

    1. P. van der Schans, Increasing Material Prices Gouge Construction

    Industry, Construction Executive, p. 26-29 (January 2005).

    1. Damage caused by hurricanes in the Gul o Mexico disrupted sup-

    plies o ethylene and natural gas dur ing the second hal o 2005. In

    the atermath o Hurricane Katrina, repair eorts along the Gul Coast

    quickly consumed many building materials, creating at least short-

    term shortages and urther price hikes. Big Home Centers Inuence

    Sways The Broader Materials Market, Engineering News-Record, p.

    29, March 20, 2006.

    1. U.S. Department o Labor Bureau o Labor Statistics, Producer Price

    Index.

    1. Third Year O Price Hikes Fueled By Hurricane-Related Disruptions,

    Engineering News-Record, p. 31, September 25, 2006.

    0. Big Steel Fabricator Is Latest To Bet On Chapter 11: Financially

    Troubled Havens Steel Seeks Relie, But Stockholders Could Still

    Loss Out, Engineering News-Record, May 24, 2004; For Fabricator,

    Steel Price Hike Helped Turn Out The Lights: Interstate Iron Works

    Liquidation Puts Big New York Job In Limbo, Engineering News-

    Record, p. 26, March 21, 2005.

    1. P. van der Schans, Increasing Material Prices Gouge Construction

    Industry, Construction Executive, p. 26-29 January 2005.

    . Extreme Price Hikes Shelve D.C. Wastewater Digester Project,

    Engineering News-Record, p. 7, October 16, 2006.

    . Will High Paving Costs Put Recycled Roads Back In The Fast Lane,

    Engineering News-Record, p. 70, June 26, 2006.

    . Prices Jump Forty Percent Over A Year Ago, Engineering News-

    Record, p. 31, March 20, 2006.

    . CFMAs Financial Survey Hot Topic: Material Shortages & Price

    Escalations, CFMAs Building Profts, p. 52-55, September-October

    2006.

    . Price Escalation Is Stuck In High Gear, Engineering News-Record,

    p. 69, June 26, 2006.

    . Cross-Cutting Management Issues, published by the Washington

    State Department o Transportation Construction Ofce, December

    31, 2005.

    . Speculation Sparks Huge Price Surge Hitting Electrical And Mechani-

    cal Costs, Engineering News-Record, p. 64, June 26, 2006.

    . For example, a transormer that costs $65,000 a year ago may now

    cost nearly $100,000, Speculation Sparks Huge Price Surge Hitting

    Electrical And Mechanical Costs, Engineering News-Record, p. 64,

    June 26, 2006 (comment by Ben Capland, Vice President o Logistics

    or Turner Construction Co., New York City).

    0. P. Bruner, Force Majeure: World-Wide Excuse or Contractual Non-

    Perormance, 2002; see also Burner & OConnor On Construction

    Law (2002).

    1. Translates as contracts must be honored.

    . 82 Eng. Rep. 897 (1647).

    . Id.

    . Dermott v. Jones, 69 U.S. 1, 2, 17 L. Ed. 762, 1864 WL 6582

    (1864).

    . Id. At 7.

    . Possibly the earliest case in this regard is Mineral Park Land Co. v.

    Howard, 172 Cal. 289, 156 P. 458 (1916) wherein the court provided

    a contractor relie rom his obligation to supply gravel reasoning that

    where a great unanticipated cost renders perormance impracticable,

    it is or purposes o the law impossible.

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    . Restatement (Second) o Contracts 265 (1981).

    . Restatement (Second) o Contracts 294 (1981).

    . For a scholarly comparison o the nature o orce majeure and com-

    mercial impracticability, see P.J.M. Declercq, Modern Analysis o the

    Legal Eect o Force Majeure Clauses in Situations o Commercial

    Impracticability, 15 J.L. & Com. 213 (Fall 1995).

    0. Compare Bonebrake v. Cox, 499 F.2d 951, 960, 14 U.C.C. Rep.

    Serv. 1318 (8th Cir. 1974) and Schenectady Steel Co., Inc. v. Bruno

    Trimpoli General Const. Co., Inc., 43 A.D.2d 234, 350 N.Y.S.2d 920,

    13 U.C.C. Rep. Serv. 993 (3d Dept 1974), order a d, 34 N.Y.2d 939,

    359 N.Y.S.2d 560, 316 N.E.2d 875 (1974) with U.S. ex rel. Bartec

    Industries, Inc. v. United Pacifc Co., 976 F.2d 1274, 41 Cont. Cas.

    Fed. (CCH) 77066, 24 Fed. R. Serv. 3d 584, 18 U.C.C. Rep. Serv.

    2d 696 (9th Cir. 1992), opinion amended on denial o rehg, 15 F.3d

    855 (9th Cir. 1994) and Belmont Industries, Inc. v. Bechtel Corp., 425

    F. Supp. 524, 20 U.C.C. Rep. Serv. 1196 (E.D. Pa. 1976).

    1. Restatement (Second) Contracts, 261 (1981).

    . Transatlantic Financing Corp. v. U.S., 363 F.2d 312, 3 U.C.C. Rep.

    Serv. 401 (D.C. Cir. 1966).

    . Raytheon Co. v. White, 305 F.3d 1354 (Fed. Cir. 2002).

    . Restatement (Second) Contracts 261 at comment d.

    . A typical concern is the reservation expressed by the Jennie-O Foods,

    Inc. v. U. S., 217 Ct. Cl. 314, 580 F.2d 400, 409, 24 Cont. Cas. Fed.

    (CCH) P 81814 (1978) ([t]he commercial impracticability standard

    can be easily abused; thus this court has not applied it with requency

    or enthusiasm. It is not invoked merely because costs have become

    more expensive than originally contemplated.)

    . L.W. Matteson, Inc. v. U.S., 61 Fed. Cl. 296, 320 (2004) citing Seaboard

    Lumber Co. v. U.S., 308 F.3d 1283, 1295 (Fed. Cir. 2002) which in turn

    relied upon U.S. v. Winstar Corp., 518 U.S. 839, 904-910, 116 S. Ct.

    2432, 135 L. Ed. 2d 964, 42 Cont. Cas. Fed. (CCH) P 77358 (1996).

    . Impracticability is a coat o many colors, and extends beyond actualimpossibility to include perormance excused because it would entail

    excessive and unreasonable costs. Natus Corp. v. U. S., 178 Ct. Cl.

    1, 371 F.2d 450, 455 (1967).

    . See, e.g., Jennie-O, supra Note 45, at 409.

    . Mitchell Canneries v. U.S., 111 Ct. Cl. 228, 77 F. Supp. 498 (1948)

    (perormance excused ater bad weather destroyed the blackberry

    crop, preventing plainti rom completing contract deliveries); Dillon v.

    U.S., 140 Ct. Cl. 508, 156 F. Supp. 719 (1957) (contractor recovered

    increased costs o supplying hay to government where severe drought

    caused a marked increase in the cost o supplies).

    0. J. D. Hedin Const. Co. v. U. S., 187 Ct. Cl. 45, 408 F.2d 424 (1969)

    (deault termination improper where contractor made heroic eorts

    to obtain cement elsewhere where his supplier could not deliver due

    to severe cement shortage o 1955).

    1. See, e.g., Tony Downs Foods Co. v. U. S., 209 Ct. Cl. 31, 530 F.2d

    367 (1976) ([t]here can be no comparison between contract losses

    caused by an unanticipated natural disaster and additional contract

    perormance costs occasioned by price controls).

    . Ocean Tramp Tankers v. VO Sovracht [The Eugenia], 2 Q. B. 226, 239

    (1964). This ormulation o beyond normal price increase has been

    cited approvingly in such cases as Eastern Air Lines, Inc. v. Gul Oil

    Corp., 415 F. Supp. 429, 19 U.C.C. Rep. Serv. 721 (S.D. Fla. 1975)

    and Appeal o Jalaprathan Cement Co., Ltd., 79-2 B.C.A. (CCH) P

    13927, 1979 WL 2356 (Armed Serv. B.C.A. 1979).

    . Aluminum Co. o America v. Essex Group, Inc., 499 F. Supp. 53, 29

    U.C.C. Rep. Serv. 1 (W.D. Pa. 1980).

    . Id. at 58.

    . Id. at 64-74.

    . It is the claimants burden to prove the amount o loss that will be

    incurred through perormance. See, e.g. Eastern Air Lines, Inc. v. Gul

    Oil Corp., 415 F. Supp. 429, 440, 19 U.C.C. Rep. Serv. 721 (S.D. Fla.

    1975) (the par ty undertaking the burden o establishing commercial

    impractability by reason o allegedly increased raw material costs

    undertakes the obligation o showing the extent to which he has

    suered, or will suer, losses in perorming his contract).

    . Appeal o Bermite Div. o Whittaker Corp., 77-2 B.C.A. (CCH) P 12675,

    1977 WL 2490 (Armed Serv. B.C.A. 1977).

    . Appeal o Jalaprathan Cement Co., Ltd., 79-2 B.C.A. (CCH) P 13927,

    1979 WL 2356 (Armed Serv. B.C.A. 1979).

    . Id.

    0. See, e.g., Geronimo Service Company, ASBCA No. 30003, (1985)

    (in the absence o an escalation clause, contractor assumed risk o

    increased costs caused by 400 percent increase in dumping ees);

    Appeal o Ace Service Corp., 86-3 B.C.A. (CCH) P 19031, 1986 WL

    20042 (Armed Serv. B.C.A. 1986) (increase in unit cost rom $3.13 to

    $10 due to unexpected closure o proximate dump site did not render

    contract unconscionable or commercially senseless).

    1. Northern Indiana Public Service Co. v. Carbon County Coal Co., 799

    F.2d 265, 1 U.C.C. Rep. Serv. 2d 1505 (7th Cir. 1986) (holding that a

    government order denying a request rom a utility to pass increased

    coal prices along to its customers did not excuse utility rom a long-

    term contract to buy coal even though contract was unproftable).

    . Id. at 275 and 278 respectively.

    . Eastern Airlines, Inc., supra Note 56, at 441.

    . Id. at 442. See also, Appeal o Southern Dredging Co., Inc., 92-2

    B.C.A. (CCH) P 24886, 1992 WL 47920 (Corps Engrs B.C.A. 1992)

    (contractor not entitled to price increase or uel due to Gul War

    because volatility in Middle East is normal and increase in price o

    oil was entirely oreseeable).

    . Chainworks, Inc. v. Webco Industries, Inc., 2006 WL 461251 (W.D.

    Mich. 2006), reconsideration denied, 2006 WL 1521946 (W.D. Mich.

    2006).

    . Webco did not argue that perormance was impossible due to short-

    age or that it was unable to deliver the required quantities.

    . Id. at *9.

    . Speculation Sparks Huge Price Surge Hitting Electrical and Mechani-

    cal Costs, Engineering News-Record, June 26, 2006.

    . Id. (commentary rom Tony Guzzi, EMCORs President).

    0. Steel Market Trends, Modern Steel Construction, March 2005.

    1. See Fru-Con Const. Corp. v. U.S., 44 Fed. Cl. 298, 314 (1999); J.

    Cibinic & R. Nash, Administration O Government Contracts, 546

    (3d. Ed. 1995).

    . F.A.R. 16.203-2.

    . The three types o F.A.R. project adjustment clauses are: (1) Adjust-

    ments Based On Established Prices. These price adjustments are

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    based on increases or decreases rom an agreed-upon level in pub-

    lished or otherwise established prices o specifc items or the contract

    end items; (2) Adjustments Based On Actual Costs o Labor or Mate-

    rial. These price adjustments are based on increases or decreases

    in specifed costs o labor or material that the Contractor actually

    experiences during contract perormance; and (3) Adjustments Based

    On Cost Indexes o Labor or Material. These price adjustments are

    based on increases or decreases in labor or material cost standardsor indexes that are specifcally identifed in the contract.

    . F.A.R. 16.203-2.

    . F.A.R. 16.203-2.

    . F.A.R. 16.203-1(a)(ii).

    . F.A.R. 16.203-1(a)(i).

    . F.A.R. 52.216-4.

    . The F.A.R. requirement seems to be premised on the notion that

    the contractor should not receive any beneft or escalated material

    or labor costs i the contractor is late in providing those materials or

    labor, since the contractors delay may be responsible, in whole or

    in part, or the cost escalation.

    0. The F.A.R. Price Adjustment Clause is designed to protect the contrac-

    tor rom only signifcant price escalations, but with a maximum cap.

    1. Although the F.A.R. allows or some modifcation o, or exception to,

    some o the standard components o the Economic Price Adjustment

    clauses, these are the essential terms set out in F.A.R. 52.216-4.

    . During the latter hal o 2005, and during the hurricane reconstruction

    eorts, Portland cement availability became a major concern or the

    transportation industry.

    . Highway Construction Cost Increases and Completion Issues, United

    States Department o Transportation, Federal Highway Administration

    (http://www.hwa.dot.gov/programadmin/contracts/price.cm).

    . Hot mix asphalt is estimated to be 36% dependent on petroleum

    products, and so the hot mix asphalt prices typically ollow a similarpattern to the price o crude oil and diesel uel. Liquid asphalt, the

    binder used or hot mix asphalt, is refned rom crude oil. In addition,

    mixing, hauling, placing and compacting hot mix asphalt requires

    petroleum products.

    . During this same January 2002 through the end o September o

    2004 period, the rebar price index maintained by the Engineering

    News-Record rose by 36%.

    . Technical Advisory T5080.3, Development and Use o Price Ad-

    justment Contract Provisions, U.S. Department o Transportation,

    Federal Highway Administration. This Technical Advisory contains

    many useul suggestions regarding material escalation clauses in

    contracts, and many o the recommendations are applicable to all

    types o construction contracts.

    . Virginia Department o Transportation Specifcation Section 5109DIC-

    0105, Special Provision or Price Adjustment or Steel, dated Novem-

    ber 29, 2004.

    . Section 9, Measurement and Payment, Florida standard Department

    o Transportation Specifcations.

    . http://www.hwa.dot.gov/programadmin/contracts/price.cm.

    0. U.S. Department o Labor Bureau o Labor Statistics, BLS Hand-

    book o Methods, Chapter 14, at http://www.bls.gov/opub/hom/

    homch14_b.htm. The three most important classifcation structures

    are (1) industry, (2) commodity, and (3) stage o processing (SOP).

    Commodity-based SOP price indexes regroup commodities at the

    sub-product class (six-digit) level, according to the class o buyer and

    the amount o physical processing or assembling the products have

    undergone.

    1. Although most PPIs, whether commodity oriented or industry oriented,

    are national in scope, regional price indexes are published or a ew

    selected items, such as sand and gravel, scrap metals, and ce-

    mentitems which tend to be more aected by regional markets.

    . In addition, and or users who preer printed publications, a summary

    o the PPI news releases is available through the mail and without

    charge rom the BLS. This document provides the most recent data

    or all SOP indexes and or selected major commodity groupings that

    make up the bulk o these indexes. A monthly PPI Detailed Report is

    published in print several weeks ater the news release date and is

    available to the public rom the U.S. Government Printing Ofce on

    a paid subscription basis.

    . The revisions to unadjusted Producer Price Indexes are normally

    very minor, especially at the more highly aggregated grouping levels.

    Very detailed inormation regarding the BLS Producer Price Indexes

    (www.bls.gov/ppi) and the BLS Consumer Price Indexes (www.bls.

    gov/cpi) is set out at the U.S. Department o Labor, Bureau o Labor

    Statistics website.

    . ENR also publishes indexes or two Canadian cities, Montreal and

    Toronto, on a monthly basis.

    . During each month, the weekly editions o ENR report on the price

    movements or the various categories o construction materials, as

    ollows: The frst monthly editionprices or 21 products covering

    asphalt, cement, aggregates, concrete, brick, concrete block, and

    masons lime. The second monthly editionprices or 20 pipe prod-

    ucts covering reinorced concrete pipe, corrugated steel pipe, vitrifed

    clay pipe, PE underdrain, PVC sewer and water pipe, ductile iron

    pipe, and copper water tubing. The third weekly editionprices or 18

    products covering lumber, plywood, plyorm, particle board, gypsum

    wall board, and insulation. The ourth weekly editionprices or 16

    products covering structural steel, reinorcing bar, steel plate, metal

    lath, aluminum sheet, stainless steel sheet, and plate and H-piles.

    . T. Grogan, How To Use ENRs Cost Indexes, Engineering News-

    Record, March 20, 2006.

    . John T. Oxley, et al. v. Oklahoma Gas and Electric Co., et al., 1982

    Okla. Civ. App. LEXIS 114 (May 4, 1982).

    . Paragon Oil Co. v. City o New York, 138 N.Y.S.2d 905 (Sup 1955).

    . See also, Glopak Corp. v. U.S., 851 F.2d 334, 34 Cont. Cas. Fed.

    (CCH) P 75509, 6 U.C.C. Rep. Serv. 2d 1402 (Fed. Cir. 1988)

    (Recovery o dramatic price reduction pursuant to a two-way es-

    calation clause was not unconscionable or oppressive at the time

    o contracting); Firestone Tire & Rubber Co. v. U. S., 195 Ct. Cl.

    21, 444 F.2d 547 (1971) (Court rejected the deendants argument

    that the price escalation clause covered price increases or steel

    commodities such as barbed wire, nails and staples, which had no

    relationship to the manuacture and delivery o the objection o the

    contract, tract shoe assemblies or tanks); and Bethlehem Steel

    Co. v. Turner Const. Co., 283 A.D. 69, 126 N.Y.S.2d 147 (1st Dept

    1953), judgment a d, 2 N.Y.2d 456, 161 N.Y.S.2d 90, 141 N.E.2d

    590, 63 A.L.R.2d 1331 (1957) (Court determines the defnition o

    component materials included in an escalation clause in a steel

    purchase contract). These cases, and sample material price esca-

    lation clauses, are discussed in the Summer 2006 edition o the

    American Bar Association Construction Forums Construct!, in an

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    Visit West on the Internet!http://www.west.thomson.com

    article by Khanah Josephson and Nicole Liguori Micklich, entitled

    Material Price Escalation Clauses.

    100. K. Josephson and N. Micklich, Material Price Escalation Clauses,

    Construct!, Summer 2006. The authors oered a number o sample

    clauses, including this: In the event that, during construction o the

    improvement described herein, contractors costs or materials used

    or to be used herein are increased by more than ____ % (110%, i

    blank) over the contractors costs or same at the time this agreement

    was signed, or any cause(s) beyond the control o contractor, then,

    and in such event(s), contractor shall have the right to pass the entire

    amount o materials costs increase(s) along to Owner by adding the

    total amount(s) thereo to the Contract Price.

    101. As earlier mentioned, a cost-based escalation scheme requires good

    and reliable data or the prices relied upon in the contractor and sub-

    contractor bids, as well as reliable cost suppor t or the actual materials

    utilized in the project. The use o such provisions adds to the owners

    administrative costs and presents possible audit-related expenses.

    Moreover, in order to utilize a cost-based escalation provision, the

    owner must overcome any tendency to suspect that the reliability o

    the cost inormation produced always will be less than desired.

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