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7 Top Strategies to Mitigating the Risk of Material Price Escalation

Updated: Jan 11

When the ball dropped on January 1 in Times Square, many of us still harbored the hope that construction costs would drop as well.

The reality? “Construction input prices rose 0.6% in December compared to the previous month, according to an Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics’ Producer Price Index data. Nonresidential construction input prices also rose 0.6% for the month.”

Who’s to blame for the rising prices of construction material?

  • Factory shutdowns: COVID-19 shutdowns and restrictions resulted in global supply chain disruption

  • Increase in construction demand: Increase in demand for residential construction and renovation during the pandemic increased prices.

  • Limited supplies: Some factories reduced supplies in response to the pandemic and are still not running at full capacity. Also, hoarding of needed supplies limited availability thereby artificially raising prices.

  • Labor shortage: An ongoing shortage of construction workers since the last housing bubble burst, compounded by the pandemic, has greatly affected the construction industry.

  • Increased salaries: Construction worker salaries have increased to meet inflationary increases, thereby increasing the builder’s cost of construction.

Economists and industry professionals have identified numerous additional factors causing or contributing to the rising prices including inflation, fuel costs increases, and new regulations. Tariffs on imported materials have also increased the job costs for the construction business and trade policies can cause market supply instability. Whatever the underlying cause, the fluctuating prices of construction materials are wreaking havoc in our industry causing delays in project completion.

All of us have been affected by the volatile effects of the pandemic. From shipping issues and backorders to rising unanticipated prices and labor shortages, we are all feeling the long-term ripple effect of the pandemic.

Material price escalation is not new to our industry. Our history and the market dictate that prices will eventually decrease. But riding out this period can be stressful for all stakeholders, owners, contractors, subcontractors, and suppliers, even those who have experienced commodity supercycles.

As seasoned professionals in the construction industry, we have been using our extensive resources and brainstorming different approaches to mitigate the risks of material price escalation during all phases of the project, beginning with the design phase and continuing through the bidding, procurement, and construction phase.

Here are 7 strategies to mitigate the risk of material price escalation:

  • Anticipate the Increase: Account for price escalation in your bids by using cost indexes such as Building Cost Index (BCI), Construction Cost Index (CCI), or Turner Cost Index (TCI) to name a few.

  • Lock in the Price: Try to lock in the price of the building price materials or cap the price with the supplier when you are creating your construction pre-bid budget.

  • Limit the Time Period: Include a clause in your bid form which allows your bid price to be valid for a limited period of time only.

  • Offer Substitutions in the Proposal: Offer alternative materials in the bid which can be substituted in case the price of the originals exceeds the allocated budget.

  • Add Exclusionary Clauses: Exclude any design changes from the original bid.

  • Consider Storage Options: Anticipate order delays and price increases and place your orders for materials with the most volatile prices once the client has signed on the dotted line. Include a clause in the bid form making the client responsible for material storage fees as a way of keeping costs within the budget.

  • Use a Cost-Plus Contracting Method: If you are using a stipulated/lump-sum contract, then include a material price escalation clause during the contract to prevent project delays.

While we are strong advocates for strategies to mitigate your risks, we do believe in being fair and equitable to the client. That is why we suggest you consider a mutual or bilateral escalation clause. That would account for price changes in either direction, escalation, or de-escalation. The bilateral clause is an equitable, collaborative way to allow all parties to share in the risk and benefits of our new uncertain reality.

And because we do believe that, like the New Year’s ball, what goes up eventually comes down.

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