Contract Terms on Megaprojects: Navigating Risk and Cost Escalation

What's Happening?

Megaprojects, often exceeding $300 million, require careful contract management to navigate risks such as cost escalation and labor shortages. Lisa Stalteri, a partner at Lathrop GPM, emphasizes the importance of effective project management and risk allocation in contracts. The construction manager at risk (CMAR) delivery method is highlighted as a beneficial approach, involving early collaboration between the construction manager, project owner, architects, and engineers. This method allows for better cost control and informed decision-making. Material price escalation clauses have become common due to market uncertainties, providing contractors with change order rights if significant price changes occur.

Why It's Important?

The management of contract terms on megaprojects is crucial for ensuring successful project delivery. Effective risk allocation and cost management can prevent project delays, insolvency, and litigation. As the construction industry faces challenges such as fluctuating tariffs and supply chain disruptions, the ability to negotiate favorable contract terms becomes increasingly important. The insights from industry experts like Lisa Stalteri provide valuable guidance for navigating complex construction environments.

What's Next?

Project owners may need to reevaluate the economics of starting construction amid current market uncertainties. The balance of risk between owners and contractors may continue to shift, with owners emphasizing contractor creditworthiness and track record. The construction industry may see further adoption of material price escalation clauses and other risk management strategies to address ongoing challenges.

Beyond the Headlines

The evolving contract landscape on megaprojects reflects broader trends in the construction industry, including the impact of economic fluctuations and labor market dynamics. The focus on risk management and cost control highlights the need for strategic planning and collaboration among project stakeholders.