Tariffs on steel and aluminum have recently contributed to an increase in materials costs. But there are many other factors that can cause prices to escalate. This article suggests some ways that contractors and subcontractors can manage the risk.
Tariffs on steel and aluminum have recently contributed to an increase in materials costs. There are many other factors that can cause prices to escalate, too, including shortages brought about by building booms in other parts of the country or world; environmental issues, such as loss of forestlands; and rising fuel and other transportation costs.
What can contractors and subcontractors do to mitigate this risk? Here are some ideas to consider.
Revisit your bidding
One option is to build some cushion into your bids to reflect the risk of materials price hikes. This approach is dangerous, however: If you overestimate the risk you may lose out on jobs, and if you underestimate the risk you may jeopardize your profitability.
Another option is to consider bidding on smaller, short-term jobs. These are less vulnerable to fluctuating materials prices.
Talk to your suppliers
It’s important to develop and maintain strong relationships with your suppliers. Doing so will help you stay informed about tariffs and other developments that may affect prices in the future and about programs available for locking in raw materials prices for a specified period. These relationships may also give you access to materials you need during times when supplies are short.
One specific topic to broach with your supplier is whether you might purchase bulk materials in advance. This can help control costs if you have the storage space and your materials needs are reasonably predictable. Naturally, you’ll need to weigh the impact on your cash flow and storage costs.
Build protection into your contracts
Among the most effective strategies is to shift some of the risk to the owner (or general contractor) by negotiating a provision in your contracts that adjusts the price periodically to reflect fluctuations in materials costs. An advantage of this approach is that it enables you to protect yourself against materials price fluctuations while keeping your bids as low as possible. Because there’s no need to build a cushion into your bids to absorb the risk of volatile materials prices, the owner benefits from lower initial prices.
Often, these provisions are referred to as “escalation clauses” because they target rising materials prices. But such clauses are more palatable to owners if they also provide for downward adjustments in the event materials prices fall.
Design escalation clauses carefully
It’s important to design escalation clauses carefully, paying attention to the events that trigger a price adjustment. It’s common to provide for an adjustment in the event materials prices rise or fall by 2% or 3%, as substantiated by:
- The contractor’s actual invoices from suppliers,
- One or more published price indexes, or
- Some combination of the two.
The clause should also specify when price adjustments are to be made, such as at the end of the contract or at fixed intervals (such as quarterly) during the life of the contract. Work with your attorney to ensure that an escalation clause achieves your objectives and that there are no other contractual provisions that override it.
Track prices carefully
Tariffs have added another layer of complexity to the challenge of managing materials costs. But careful tracking of the rise and fall of prices and savvy timing of purchases can help matters.