The ongoing shortage of steel and high prices have continued to produce delivery problems, lowered profits and in some cases seriously damaged or crippled highway contractors and suppliers. The recent shortage of cement also is creating big problems for the highway construction industry. According to a recent survey by Portland Cement Association, 23 states were reporting cement shortages, even with U.S. plants operating at maximum capacity. Contractors have sought both additional sources for the materials, including Mexican cement, and have asked for adjustments to their contracts to account for the increased prices of steel.
To date, the government has not lifted the tariff on Mexican cement or offered any relief for rising steel prices or rising cement prices under existing contracts.
However, there is a provision for government construction contracts to include an escalation clause, provided that it is needed to protect the contractor or the government from “significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractor’s established prices.”
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Escalation clauses have been around for more than 30 years, dating back to the OPEC oil embargo in 1973. Although many state DOTs have incorporated escalation clauses for asphalt and fuel in highway and bridge contracts since the embargo, they are just beginning to extend these clauses to cover steel. Currently, no states offer escalation clauses for adjustment of cement prices.
The government’s response to the rapid rise in steel prices serves as a rubric for comparison to the present cement shortage. In April 2004, the FHWA released a statement concluding that federal law does not allow use of federal funds to pay for retroactive price adjustments to existing construction contracts. FHWA’s announcement added, “We recognize that there may be cases where price adjustment clauses are needed. On that basis, we do not object to the use of price adjustment clauses on Federal-aid contracts with the following conditions. Should the State wish to add retroactive price adjustments solely with State funds and have the capability to do so . . . they can on Federal-aid contracts on a non-participating basis.”
In simple language, states may use their own money to provide relief on federally funded highway projects in the form of retroactive price adjustments. However, the FWHA cautioned states to “consider both the precedent setting nature of the action on firm, fixed-price contracts and ways to limit the precedent.” FHWA also has taken the position that if there is no price adjustment clause in the bid documents, contractors should put contingencies in their bids to cover potential shortages and spiraling prices for materials.
The FWHA did say that states could use escalation clauses for steel in new contracts, provided that the clause was included in the agency’s Request for Proposal (RFP). Potential adjustments under new contracts with escalation clauses are still subject to limitations, mainly a 10% ceiling for increases to the aggregate price of the original contract. To date, no equivalent provisions for cement exist. Some states are providing relief for steel price adjustments under existing contracts. For example, New York’s state budget package contains a conditional provision where contracts may be adjusted if the awarding agency finds that there has been an increase of more than 5% in the cost of steel material since the contract award. However, if steel prices happen to fall below the contracted price, contracts are subject to a downward adjustment as well. Contractors may need similar state involvement if the price of cement follows that of steel.
Clearly, material shortages and unanticipated price increases occurring after a contract is awarded is an economic risk contractors cannot afford to take. Because cement is considered a non-volatile commodity unprotected by escalation clauses, contractors might get squeezed by both high steel and potentially rising cement prices. If FHWA remains unwilling to find a solution to the problem, more states must provide relief to avoid losing many of their contractors.
