As a direct result of plant closures during the first wave of COVID-19, the cost of construction materials has fluctuated considerably throughout North America since the spring of 2020. The prices of nearly all industrial products, including softwood lumber and other wood products, have been on the rise since early 2021. These increases are giving contractors headaches because it’s difficult for them to make fair bids that are not exposed to risks tied to significant price increases in the course of a year. The challenge is aggravated by the fact that the work might not be completed for several months, during which new increases could occur. Given this context, how can contractors protect themselves against such increases? Shouldn’t clients be the ones who absorb these increases, since they are the ones who will ultimately be benefitting from the work and the final product? Legally speaking, who must assume increases in the prices of building materials?
To answer these questions, we need to go back to the terms of the contracts duly negotiated by the parties, since there are tools for guarding against such increases.
Tools for guarding against increases in the prices of materials
i. Cost-plus contracts
One way for contractors to protect themselves against significant increases in the price of materials is to enter into cost-plus contracts that address time and materials. This type of contract is defined in article 2108 of the Civil Code of Québec and provides that, where the price is fixed according to the value of the work performed, the services rendered or the property supplied, the contractor must, at the client’s request, give him an account of the work progress, of the services that have been rendered and of the expenses incurred so far.
Cost-plus contracts protect against increases in the price of materials because the contractor will be paid for the actual value of the work done, the services rendered and the property supplied. However, neither public-sector nor private-sector clients or owners tend to use this type of contract. Clients generally prefer fixed-price contracts, under which the contractor promises to do the work for a set price. Defined in article 2109 of the Civil Code of Québec, this type of contract provides that the price fixed by the contract remains unchanged notwithstanding any modification of the original terms and conditions of performance, unless the parties agree otherwise.
Consequently, given the way article 2109 is drafted, such contracts can include various clauses allowing for prices to be adjusted based on changes in the prices of materials, since those clauses are a way for the parties to “agree otherwise.” Such clauses have already been found lawful.1
ii. Price adjustment clauses
It is entirely possible, and in fact preferable, to include a price adjustment clause in a construction contract, regardless of the type of contract. Some of these clauses provide for an upward or downward adjustment depending on the situation prevailing at the time of the supply, while others state that an increase will be deemed equivalent to a supplementary work request. It is also possible to specify that no additional amounts will be granted in the event of price variations. Thus, thanks to price adjustment clauses, contractors can be compensated for their excess costs.
However, it is important to note that contractors that intend to rely on a price adjustment clause based on unforeseeable increases in the prices of materials need to ensure that the amounts they claim on this basis do not result from a negligent assessment on their part. This means that contractors need to check with their suppliers to find out (i) what the products are costing; (ii) what the availability of the products is (to ensure that a foreseeable shortage or unavailability isn’t responsible for a price increase); and (iii) how long the products will be available at their quoted prices. To avoid any unpleasant surprises, contractors should also specify expiry dates for their bids.
a. Price adjustment clauses in public contracts
With public contracts, potential bidders can ask the client to amend the tender documents during the bidding period to include a clause allowing for the price to be revised if materials increase in price. This can be done by issuing an addendum. Once the addendum is issued, the contractor must follow the parameters of the clause to determine when a material price increase can be claimed from the client, and how much can be claimed. In the absence of such a clause in the contract, a contractor cannot claim additional costs resulting from a material price increase. Contractors should avoid unilaterally inserting such a clause or condition in their bids; it is very likely that the client will declare the bid non-conforming in such a case because it prevents the client from being able to draw fair comparisons. This is why it is best to negotiate the clause in advance and obtain an addendum during the bidding period.
b. The Société québécoise des infrastructures (SQI) takes the lead
To relieve contractors from the risks associated with increases in the prices of materials, certain public project owners, including SQI, have decided to act. SQI has added price adjustment clauses to the construction contracts it awards. Under these clauses, when the price of a material fluctuates upward or downward by more than 5% between the time a bid is made and the time the contract is to be carried out, SQI will adjust the price of the material in the contract and will reimburse the contractor in the event of a covered increase. To ascertain these price fluctuations, SQI will use Statistics Canada’s Industrial Product Price Index (IPPI).
Although this process can result in decreases as well as increases, contractors will no longer fear fluctuations in the prices of materials. As a result, contractors should be able to offer better pricing, since they no longer bear a risk tied to a variable over which they have no control. These changes are likely to have direct impacts on government cost management.
However, it should be noted that this system has not been tested so far because SQI has not yet awarded a contract containing such a clause. That said, if the clause proves helpful and effective, other clients in the public sector are likely to follow suit, though the adjustment parameters, which are likely to be the subject of negotiations between the parties, might be different.
Claims submitted to clients in the absence of a price adjustment clause
Since early 2021, construction law departments have been facing a recurring question: Is it lawful to threaten unilateral contract termination, litigation or bankruptcy to offset the absence of a price adjustment clause?
Such things have been observed in the industry, even where contracts have been signed without clauses that allow for price increases. Contractors justify their requests for increases over and above the agreed prices on the basis of massive increases in building material prices or on the basis of COVID-19; they argue that these should be treated like a force majeure, which is an event totally beyond their control that they feel should enable them to revise the terms of duly negotiated contracts. It should also be borne in mind that these price increase requests are often made at inopportune times, in the weeks preceding the delivery of the work.
Subject to some exceptions, a contractor cannot expect to unilaterally terminate its contract with a client without running the risk of being sued. Unilaterally increasing a price agreed upon in advance is not an option unless there is a clause allowing for it. Even when there is such a clause, there is a chance it might be challenged if it was drafted abusively. In any event, such clauses should be arrived at by mutual consent, not unilaterally imposed. As we have seen, it is entirely possible to split the risk of construction cost fluctuations between contractor and client, as long as this is done in the contract before it is signed.
i. The specificity of force majeure
Force majeure is the only reason that enables contractors to be relieved unilaterally from their responsibilities. Note, however, that the burden of proving force majeure is on the contractor. Force majeure continues to be defined as a factor unforeseeable to the contractor. In light of the foregoing, a distinction needs to be made between contracts signed before the pandemic and contracts signed during the pandemic. For contracts signed before the pandemic, it is our opinion that contractors might succeed in convincing courts that there is force majeure2. We do not expect this to be the case for contracts signed during the pandemic, because contractors would be unable to argue that the element was unforeseeable and irresistible; the contracts were signed in knowledge of the situation. Still, the burden of proof on contractors under these circumstances, though heavier, is not insurmountable. It all depends on the facts.
In our estimation, the main defences that owners and clients can raise in opposition to these claims are as follows:
i. The contractor is suffering no economic harm; it already bought or reserved materials in sufficient quantity for the contracts it has signed.
ii. The increase in the prices of materials is being exaggerated. Labour and profit are also a major part of the total cost.
iii. The increase in real estate prices and the fact that the contractor is very much aware that if it were to resell the same house today to someone else, it would get a better price. Therefore, the objective is not to offset losses on the prices of materials, but rather, to unlawfully profit from the overheated real estate market.
Legislation in the works to counter contract price increase claims
Although they do not constitute a generalized practice in the construction industry, claims for contract price increases have become considerably more frequent. To combat the practice, the Association des consommateurs pour la qualité dans la Construction (ACCQ) has asked Quebec’s minister of municipal affairs and housing that
i. the Regulation respecting the guarantee plan for new residential buildings be amended so that a contractor who unilaterally terminates its preliminary contracts without having the right to do so and for one of the grounds referred to above loses its accreditation for 1 to 5 years, depending on the gravity of the case; and
ii. the Régie du bâtiment du Québec undertake efforts to have the licences of such contractors cancelled on the basis that they no longer deserve the public’s confidence.
Although we doubt that these legislative and regulatory amendments will happen soon and before the phenomenon has dissipated, it is worth remembering that 2022 is a general election year, which means that bills might be adopted more quickly in response to pressure from major real estate purchasers and major project owners.
- Pavage JD inc. c. 9301-3845 Québec inc. (Roc-Sol inc.), 2018 QCCQ 9969; Ville de Granby c. 9280-4731 Québec inc., 2020 QCCQ 1298.
- Didier LLUELLES and Benoît MOORE, Droit des obligations, 3d ed. (Cowansville: Yvon Blais, 2018) at para. 2733 et seq.; Pierre-Gabriel JOBIN and Nathalie VÉZINA, Les obligations, 7th ed. (Cowansville: Yvon Blais, 2013) at para. 844 et seq.