Builders Confront Price Spikes in Devastated Areas
While inevitable spikes in building materials prices such as those following last year’s hurricanes in Florida are now occurring along the Gulf Coast and in North Carolina in the aftermath of Katrina, Rita and Ophelia, builders and remodelers need to be on guard against price gouging by suppliers and take steps to limit their exposure to unforeseen costs in their sales contracts.
Gouging occurs when suppliers set their prices far higher than their costs and a reasonable profit margin. The victims are typically those who are in dire need of crucial goods and services and can find little or no alternative means of supply.
Every state has some form of emergency preparedness act that prohibits excessive pricing following the declaration of a state of emergency by a state or local government.
The following statutory provisions apply during states of emergency in states that have recently been affected by the hurricanes:
- Alabama state code section 8-31-3 prohibits unconscionable pricing during a declared state of emergency. It is illegal to charge a price that exceeds 25% of the average price obtainable in the affected area during the last 30 days prior to the declaration of a state of emergency.
- Louisiana section 29:732 prohibits price gouging. It is illegal to charge more than was ordinarily charged for goods and services in the affected area immediately before the time of emergency.
- Mississippi Title 75, Chapter 24, Regulation of Business for Consumer Protection, section 75-24-25 establishes that the price for all goods and services within the designated emergency area shall not exceed the prices ordinarily charged immediately before the declaration of a state of emergency.
- North Carolina section 75-38 prohibits excessive pricing during a state of disaster. It is illegal to sell or rent at retail in the affected area during a state of disaster any merchandise or services consumed as a result of the emergency, or used to protect persons or property, at a price that is unreasonably excessive under the circumstances.
- Texas Business and Commerce Code, section 17.46, Deceptive Trade Practices Unlawful, makes it illegal to take advantage of a disaster declared by the governor by demanding, selling or leasing fuel, food, medicine or another necessity at an exorbitant or excessive price.
Each state has certain statutory exceptions that include the right of the supplier to pass along reasonable, additional costs that may have been incurred in connection with the sale of the goods and services.
In interpreting these exceptions to the price gouging statutes, courts have stated that "(not) all price increases are prohibited during these periods of abnormal market disruptions. A merchant may avoid liability under the statute through proof that other costs explain the increases."
Even with anti-price gouging legislation in place, following a natural disaster the cost of building materials in affected areas can be expected to rise because of increased costs of delivering and preserving the materials.
And outside the affected area, where anti-price gouging legislation does not apply, the cost of building materials will also rise because of an increase in demand from within the affected area.
A builder or remodeler's profit margin can be seriously eroded, or even turned into a loss, when the bid or contract price on a job is a fixed amount, and subsequently the price for building materials rises significantly.
NAHB's sample escalation clause can help protect builders and remodelers from the adverse consequences of cost spikes, especially for materials with volatile markets following natural disasters, or in markets where there are indications of possible shortages.
SAMPLE ESCALATION CLAUSE
The contract price for this residential construction project has been calculated based on the current prices for the component building materials. However, the market for the building materials that are hereafter specified is considered to be volatile, and sudden price increases could occur. The Builder agrees to use his best efforts to obtain the lowest possible prices from available building material suppliers, but should there be an increase in the prices of these specified materials that are purchased after execution of contract for use in this residential construction project, the Owner agrees to pay that cost increase to the Builder. Any claim by the Builder for payment of a cost increase, as provided above, shall require written notice delivered by the Builder to the Owner stating the increased cost, the building material or materials in question, and the source of supply, supported by invoices or bills of sale.
Specified Building Material / Current Price per (Unit of Measurement) / Date / Supplier
(Add additional lines as necessary.)
SPECIAL CIRCUMSTANCES — RIGHT OF TERMINATION
Should there be a rise in the cost of any specified building material or materials, exclusive of any other price changes, that would cause the total contract price to increase by more than _____(%), the Builder shall, before making any additional purchases of specified material or materials, provide to the Owner a written statement expressing the percentage increase of the contract price, the building material or materials in question, and the dollar amount of the price increase to be incurred. The Owner may then, at his option, terminate the contract by providing within _____ business days both written notice of termination to the Builder, and payment to the Builder for all costs expended in performance of the contract to the date of termination, plus payment of a prorated percentage of the Builder's profits based on the percent of completion. Should both notice of termination and full payment not be forthcoming within _____ business days, as provided herein, the Builder shall have the option to terminate the contract, or to proceed with the contract and purchase the specified building materials at the increased price. If termination is elected, the Builder shall provide to the Owner a written notice of termination, and the Owner shall be required to pay the Builder for all his costs expended in performance of the contract to the date of termination, plus payment of a prorated percentage of the Builder's profits based on the percent of completion. If the Builder elects to proceed on the contract, he may then purchase the specified material or materials at the increased price, and the Owner shall be required to pay the increased cost incurred.
CAUTION — The sample language provided in this clause is intended for general informational purposes only, and may not be appropriate for some agreements. Care should be taken in the drafting of any contractual clause, and it is recommended that an attorney be consulted concerning both applicable law, and the phrasing of particular contract provisions.
For more information about this item, e-mail David Crump, or call him at 800-368-5242 x8491.