State contractors are lobbying the Legislature to allow bigger budgets for public construction projects, citing the rising cost of building materials. Under proposed legislation, the state would reimburse firms for material cost overruns.

Some economists are sounding the alarm, however, saying the bill could provoke further price escalations in the construction industry.

“Even announcing a policy like this would send a signal to the market that vendors of construction goods can raise their rates because the state government of New York will subsidize” them, said Barbara Denham, senior economist at Oxford Economics. “It can be inflationary.”

Rising prices and supply-chain delays are making builders desperate for relief, said Louis Coletti, president and CEO of the Building Trades Employers Association, New York’s largest construction contractor organization.

“Costs are going through the roof and into the sky,” Coletti said. “It’s fuel, it’s steel, it’s carpentry, it’s all material used on a construction project.”

The price of steel and other metal products is up 106% from April 2020, according to the federal Bureau of Labor Statistics. The London Metal Exchange—which includes copper, aluminum, nickel and zinc—rose 32% last year after increasing by 20% in 2020. Gas prices in New York state have reached close to $5 per gallon this year.

Coletti said for projects that have already been bid, contractors are locked into an unrealistic budget.

“Small companies can be put out of business when your prices are bid for a job with fixed costs,” said Robert Wessels, executive director of the General Contractors Association of New York. “Supply and demand prices went through the roof, and contractors were left holding the bag.”

Proposed legislation would allow amendments to multiyear public contracts with state agencies and public benefit corporations. They include the Metropolitan Transportation Authority, the Empire State Development Corp. and the New York City Economic Development Corp.

State Sen. Elijah Reichlin-Melnick, who represents parts of Rockland and Westchester counties, has sponsored a bill that would have the state cover the material cost escalations.

“Lots of contractors made good-faith bids to the state before the pandemic began, and they find themselves almost losing money on doing some of the jobs,” Reichlin-Melnick said. “It doesn’t seem fair to me that contractors are out of luck because the economy went haywire.”

His bill was reported to the Senate finance committee after having passed the Senate procurement and contracts committee unanimously this week.

Kenneth Zebrowski of Rockland County has sponsored a companion bill in the Assembly.

The bill would set up a mechanism that gives each agency or public authority—together with the state comptroller’s office—the ability to evaluate requests from contractors to substantiate cost escalations. Contractors could apply for a revised contract on any material cost greater than 5% from the original bid price made prior to April 1, 2020. It would then be up to the state to consider whether to make the payment or not.

“Maybe the state pays 75 cents on the dollar, or the whole dollar, but the state will have to come up with the money to pay any sort of cost overrun,” said Peter Rescigno Jr., director of operations at the New York Electrical Contractors Association. “We don’t know what that looks like yet, but the payment is coming somewhere from the state agency.”

Rescigno added that the true price escalation began in April 2021. He said he is working on having the legislation move up the contract amendment threshold date to April 1, 2021.

Coletti warned that without the legislation the entire construction industry could face a slowdown and hold up numerous public building projects including bridges, roads and schools.

“We’re not going to be able to build as much if costs are going up,” he said. “It might force us to defer or delay projects that city and state agencies were planning to do with that federal infrastructure money because of the material supply delays.”

The state passed similar price-revision subsidies for public contractor agreements in 1974 during an oil embargo and again in 2004 when steel prices increased substantially. The state Department of Transportation allows for “additional compensation” to contractors for increases or decreases in the price of asphalt, fuel, iron and steel products, according to Section 698 of the 2019 DOT standard specifications.

Reichlin-Melnick said the bills have “strong bipartisan support.”

“This is something that really crosses party lines,” he said. “There’s not a lot of opposition.”

Matthew Gorton, spokesman for the Empire State Development Corp., said the agency would not comment on pending legislation.

The New York City Economic Development Corp. did not respond to a request for comment.

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