The concerns about rising costs for construction materials are not new, but the recent volatility in pricing seems to be wreaking havoc for development projects that are making the final push towards locking in pricing, closing on financing, and commencing work. The need for someone to ultimately bear the risk of completing the project, regardless of whether that can be done on budget, is stressing not only the owner-contract-subcontractor relationship but also the lender-borrower and sponsor-investor relationships. There is no easy or uniform answer as to how to manage uncertainty around costs and allocate potential overruns. Typically, however, the buck stops with the completion guarantor, so that's a tough place to sit in new deals these days, yet also an opportunity for those who are comfortable with the risks to achieve outsized returns. As always, it's critical for all parties to be well represented in their construction, loan and venture agreements, to avoid misunderstandings (or worse) if things don't go exactly as planned.
Owners, general contractors and subcontractors are all trying to make sense of how to limit their liability in the wake of surging prices for lumber and other materials, and the price escalation has brought increased focus on existing contract language as well as intense negotiation as new contracts are inked.
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