Thursday, June 16, 2022

Cost management, and force majeure

Are you doing a project under a contract from a sponsor?
When did you do the cost estimating for the price you signed up for?
Is there a clause for "force majeure" (Look in the fine print in the contract's boilerplate)

A lot of contractors (and their lawyers) are spending time on "force majeure"

Three elements required:
(1) unforeseeable event, 
(2) outside of the parties' control, that 
(3) renders performance impossible or impractical.

Did someone say "black swan"? They might have.
So, among the favorites these days are:
  • Supply disruptions affecting schedule and price on account of the pandemic
  • The war in Ukraine (although there is a war somewhere almost all the time)
  • Historically high inflation wrought by the factors above
It's argued -- in the case of contracts that have been ongoing since before mid-2020 -- that these are all 'black swan' events or outcomes not reasonably predicted and their effects not reasonably understandable in foresight. So their impact could not have been accounted for in the original contract price. Ergo: invoke 'force majeure'

A case to be made
  • COVID brought, or is bringing, travel restrictions and quarantines. So that's a pretty solid case for some labor related costs. But, that's getting to be old hat. It's been around since early 2020. In 2022, it's perfectly foreseeable; but if you bid your contract in 2019, or even 2020, then you've probably got a case. 
  • So also has COVID impacted supply all around the world. Another arrow in the quiver, as it were. But again, supply problems have been around since the pandemic.
  • And COVID is behind  massive government stimulus which some believe is the root cause for inflation. Economists are a bit divided on this as the root cause because also there is somewhat independent monetary policy to consider (cost of money), but certainly 2022 is at significant variance with the prior 20 years.
Pricing leverage
So, it comes down to this: do you have pricing leverage with your sponsor? FM clauses may help, but a contract cancellation in the event of a sponsor push-back may not serve your interests either.

Tricky business, this!

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