Escalation Clauses: Passing the Buck Back to the Government

Tue March 09, 2004 - Northeast Edition

Pat Loftus, president of High Steel Structures, a steel bridge contractor in Lancaster, PA, is playing a leading role in the construction industry’s efforts for price adjustment clauses in highway contracts that would compensate for the sudden, sometimes devastating, rise in steel prices. President of the Materials & Supply Division of the American Road & Transportation Builders Association (ARTBA), and on the executive committee of National Steel Bridge Alliance, he explained the crisis in the following interview.

Q. Has the rise in steel prices caused a crisis in the construction industry?

A. Yes.

Q. Could you explain why?

A. Price increases could easily cost contractors multiple millions of dollars on large projects like the Woodrow Wilson Bridge in Washington, D.C. Bridges like this contain a lot of steel rebar, deck pins, and structural steel fabricated beams that support the bridge.

Q. Do highway projects also face losses?

A. Yes. Steel is used on things like overhead sign supports, and miles and miles of guardrails.

Q. You are one of the industry leaders in urging the Federal Highway Administration [FHWA] and state highway departments to authorize price escalation clauses for steel for both existing and future contracts. Would this mean rewriting contracts now in force?

A. No. The intent would be to keep existing contracts without major disruption but allow a pass-through. Steel mills are now passing their increased material costs to fabricators. Escalation clauses would allow the fabricator to pass these costs to the general contractor, who would then pass them to the state DOT [Department of Transportation], which would then be compensated by the FHWA. That’s what we hope will happen.

Q. Would it happen fairly soon?

A. We think so. There have been a number of meetings of ARTBA, the AGC [Associated General Contractors of America], and the National Bridge Alliance with the FHWA and the American Association of State Highway and Transportation Officials [AASHTO].

We hope that within the next week or so we can rewrite reconcile inputs from FHWA, AASHTO and the industry into something workable for everyone, adding some sort of escalation clause, hopefully not only to future contracts but also to existing contracts which are impacted by this price increase, which no-one anticipated.

Q. Highway contracts didn’t have escalator clauses in the past?

A. No. It [steel pricing] was pretty predictable. The real difference was that, say, a bridge contractor would make a cost estimate and submit a price to a general contractor. We traditionally have done that by getting a firm commitment from the steel mill — the original supplier — for both the quantity of steel and the price for the given timeframe. They would hold that price for the life of the contract. That’s the way we’ve done business for 50 or 60 years.

What has happened here is that the price of scrap, in particular, has gone up so dramatically that the steel mills just came back to us and said, ’Sorry, we can’t honor those agreements. It’s too much of a loss for us and we’re going to have to pass that on to you.’ So what we’re asking now is to be able to pass that cost-increase back on to the government because we had no way to anticipate this.

Q. So it wasn’t written into the actual contract that steel had to be purchased for a certain price?

A. No, it was a commitment that we would have between the steel supplier and the fabricator but the suppliers are no longer able to honor those.

Q. Has the sudden rise in steel prices impacted your company?

A. Yes.

Q. Have prices increased 30 percent or even higher?

A. The price of the raw material that we purchase, including the surcharge [from steelmakers] is probably in that order of magnitude, yes, which is an enormous number for us.

Q. So you are being hit by surcharges just like manufacturers of equipment?

A. Absolutely.