Protecting the Economic Viability of Development Projects in an Age of Construction Material Cost Increases: One Solution


Unpredictable construction and labor costs continue to have a significant impact on project viability.  A September 2018 Meyers Research study, Cost Drivers Impacting Housing, funded by the California Homebuilding Foundation, identifies construction material shortages and costs as a significant factor impacting the supply of housing.  Framing lumber, ready-mix concrete, plywood/engineered wood, and gypsum were cited as impacting up to 21% of survey respondents.  On October 10, 2018, the Associated General Contractors of America reported double-digit cost increases in common construction materials.  Its chief economist, Ken Simonson, commented that the cost-data likely under-reports actual increases, as data was collected prior to the imposition of new and additional tariffs.  Local press coverage suggests that construction costs are significantly impacting the delivery of housing in the Bay Area.

One way that general contractors can protect against construction cost increases is by confirming material supply bids under California Commercial Code section 2205.  That is, when a contractor receives a quote for construction materials that exceeds $2,500, and it intends to rely on that quote in making its own bid for a construction contract, the contractor should notify the merchant of its intent to do so.  This action makes the material supply quote irrevocable for a period of 10 days after the contract is awarded to the prime contractor, for up to 90 days after the bid was rendered.  The quote can be formally accepted by the contractor in that 90-day time-frame.

The failure to confirm the construction materials quote releases the merchant from its offer.  The consequences to a construction project can be significant insofar as the merchant no longer has an obligation to supply the materials, and it has no obligation to honor the original quote.  Construction delays and cost overruns often result.

Project developers can assure that general contractors obtain a “firm offer” to supply construction materials by including confirmation requirements in the bidding documents for a project.  The obligation to notify the merchant should be reiterated when the construction contract is awarded.  If the contractor fails to confirm the offer, resulting cost increases should not be borne by the developer.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full-service real estate law firm.  We specialize in land use, development, and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.

 

Authored by Reuben, Junius & Rose, LLP  Attorney, Corie A. Edwards

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full-service real estate law firm. We specialize in land use, development, and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision, and condominium work.