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Opinion: Five steps to navigate ‘fierce’ construction cost increases

Experts say few things are rocking the industry more than the rapidly escalating costs we’re seeing in construction right now.

The construction industry is a roller coaster ride at the best of times. But few things challenge the industry more than the fierce cost escalation that construction is currently experiencing. Unfortunately, with escalation, someone in the process often has to lose.

Cost escalation is particularly difficult because it severs the bonds and expectations on which the industry depends. Owners rely on the price certainty that contractors and suppliers are usually able to provide. Without this certainty, the whole construction process collapses. Escalation, however, cannot simply be managed by transferring the financial risk to contractors and suppliers with stricter contract terms. Nor can it simply be passed on to the owner – the owner usually did not anticipate this and may not have the capacity to absorb it.

What can be done to navigate the escalating storm?

For owners and developers, the key is engagement with their contractors and suppliers. It’s not as simple as having the right contract terms. While an owner can legally limit their exposure to escalation through contract language, it will not help that owner if the contractor is unable to meet the terms of the contract or fails to terminate the contract due to insolvency. An owner’s engagement with contractors and vendors includes understanding what contractors and vendors face and finding a contractual arrangement that effectively manages risk. While escalation will continue to be unpredictable, understanding and managing risk in the project procurement process is the best way to ensure a successful outcome.

Owners and developers should also limit their expectations of contractors and suppliers.

In a normal market, it might be reasonable to expect prices to be maintained for several years. This expectation is probably not reasonable in an escalating market, and the owner should adjust their expectations accordingly. In a rapidly growing market, organizing the project around reasonable expectations can become critical to project success.

For contractors and suppliers, there are at least five things that can be done to weather the escalating storm.

First, be transparent. Transparency with your client will build the trust needed to successfully manage the escalation.

Second, watch the language of your contract. Your client will have little sympathy for you if you sign a fixed price contract and simply expect to be relieved of their demands.

Third, understand your risk. While it can be difficult to predict where the escalation will go with your product or service, you are probably in the best position to understand the risk. So proactively assess your risk and share this assessment with your clients.

Fourth, be creative. The risk of escalation can be managed in different ways; it’s up to you to find solutions that will work for your customers.

Five, be ready. If you need to file an escalation claim, you’ll want to have documented in detail exactly how and when you were affected. Organize your evidence in advance to establish a solid climbing claim.

The construction industry is rarely boring and today’s environment is no exception. But with careful planning, open communication and patience, the industry will successfully weather the escalating storm. •

– Norm Streu served the BC construction industry for 25 years as a prominent business leader and lawyer and is a past president of the Vancouver Regional Construction Association. Christopher Hirst is the managing partner of Alexander Holburn LLP.