Price Increase Considerations in Government Contracts

Above-average material price inflation and supply chain constraints have hit Texas cities hard. Market volatility has limited the availability of certain materials or caused their lead time to increase significantly, impacting municipalities’ abilities to complete critical infrastructure improvements, or otherwise effectively administer their contracts. While dynamic world events are beyond cities’ control, workable strategies can mitigate such issues to keep projects moving forward.

Occasionally, project managers may agree to a delayed notice to proceed in order to give contractors time to procure long lead items. Extensions of contract time may also be an option. If specific material is unavailable, project managers can substitute other products of comparable quality that serve the needed purpose. Managers can also buy project materials in advance and then arrange for the materials to be stored at city facilities until ready to be incorporated.

While commodity contracts typically include automatic price increase clauses, services contracts may not. In such cases, appropriately authorized city individuals may, in extraordinary circumstances and in their discretion, approve an increase to unit prices. The contractor must be able to demonstrate verifiable cost increases or other issues, such as suppliers or subcontractors being unable to provide the needed materials. Any price increases are, of course, subject to statutory or contractual limitations. If a city must amend a contract to authorize a discretionary price increase framework, the governing body may have to approve the amendment. Project managers are advised to follow their chains of command to avoid misunderstandings and further delays.

A municipal attorney might draft a contract to keep costs static for the first con- tract year but allow a contractor to request an adjusted price beginning in the second year. The contractor should submit the request to the designated city individual and include current written documentation from a relevant, nationally recognized index detailing the rationale for the adjustment. If price volatility provides an opportunity for reduced costs in the short term, an attorney could draft the contract to mandate pricing to revert to the previous level if the index level falls.

Material or labor price increases alone are not the sole cause for project delays. Sometimes contractors or developers fail to meet project milestones for unrelated reasons. But without transparent communication between contractors and proj- ect managers, it may be difficult to know what those reasons are. Managers should be transparent with contractors about when price increases are feasible and appropriate. Cities might consider a contractor’s compliance with prompt payment and prevailing wage requirements or other critical contract terms and conditions when determining price increases, so managers should also thoroughly monitor all relevant aspects of a contractor’s performance throughout the contract lifecycle. Managers should always follow their internal procedures and consult with their counsel, if necessary, to ensure any price increases are done in accordance with relevant laws and city policies.

Martin Buzak is a senior assistant city attorney in the City of Houston Legal Department, where he serves as the chief of the department’s Contracts Section.

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