Hi all,
I’ve been having some serious dilema over potential significant material price increases from the time of entering into a contract till job completion. I’m sure we’ve all been concerned about how to address this issue & I have consulted an attorney to advise me of verbage to use in my proposals to accomodate this. At first the attorney informed me that this is just part of doing business and sometimes you just have to absorb these costs and hope that you can make it up on other jobs. I agreed that, under normal circumstances, this may be true but we run the risk these days of losing most of , if not all of ,our entire profit margin as prices all across the board soar. I was provided a clause to add to my contract which has not been received well at all. Or accepted for that matter. We can’t provide contracts for customers that leave so many open ends that this makes them ask, “Why even have a contract?”
Does anyone have any advice or input on how they are addressing this issue?
Thank You,
Phil Vanderloo
Hiline Builders
Replies
here is ####possibnle answer to educate customers who reject a cost escalation clause or ask that question...
"The purpose of the contract is to define the scope of work and to set parameters for the payment due. The escalation clause defines and limts what those costs are.
The other choice for a contractor who enters into a locked price is to anticipate what the price increases might be and to lock that inceased price into the contract regardless of whether it occours or not. This may very well cost the client more money in the long run, as some increses anticipated fail to materialize
Failing either of the above, the final solution is for a contractor to accept a contracted price locked in to the lower present price and to operate at a loss until he goes out of business. I am sure that you do not want to do business with someone who is so short sighted as to operate this way and who will then not be around to service your future needs. We wantr to be here for some time to come."
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I have this very dilemma at the moment. I'm working on a budget for a long-term job that has ~$85,000 in materials in it at today's prices. My thinking is that there is risk of general escalation in the range of 15-20% over the period of the job, so I can't simply budget for $85K. I am going to explain this to the owner and ask if he wants me to decide on and include a contingency in the budget, or whether he'd like some of the significant materials on a pay-as-we-go basis. If he wants me to, I will bill him for the materials on an ongoing basis with no guaranteed cap, and the labor as a fixed price item. If he wants me to take the risk, I'll do it for a price.
Of course we could always have another war start at the same time as a hurricane or earthquake hits, and then we have more than 20% escalation. I may include a clause in the contract that addresses unforeseen major events that affect the price of goods (things aside from general economic ups and downs).
Thanks Dave,
Just for your info, the numbers I've been hearing over the wire suggest that price increases could greatly exceed 20%. OSB, for example is up 50% in some places over the last 6 months or so.
Watch your back side cause, with numbers like these, we're not talking about working for wages. It's more like working for free!
Phil
Certain items like plywood and OSB have increased 50-60% recently. Many others are stable. According to what I'm observing, the overall cost of materials may move in the 20% range, but it will be driven by a few items.
I expect a lot of the things I'll be buying to stay flat, and I'll buy a lot of them shortly after signing the contract. All of the fixtures, appliances, windows, doors, roofing, some exposed beams, etc--that stuff will be bought and on site within 30 days of the job starting. There is room to store everything. The owner knows he'll need to pay me for them on that time frame.
Things I can't lock in--lumber, concrete, sheet goods, etc. may fluctuate, but barring another major event we shouldn't see spikes in those items during winter. Even if lumber doubled I'd be within my 20% contingency on materials overall.
I ain't saying I like it, but I would be less happy trying to manage a materials escalation clause--too much paperwork and too much potential friction with the owner. Anyway, I'm pretty good at creating slush funds in my budgets, and it's highly unlikely I'll get stuck.
This scenario only works in the short term. In a few years I think that fuel prices will have put the hurt on everything and everyone.
Thank you for your response Piffin. I many want to clarify though, that the customers I am presenty negotiating with have no problem compensating me for potential material price increases but are just concerned about the verbage in the contract, as am I. We just want it to be fair and very clear as to how it will be handled. I think the response regarding provision of pricing at the time of execution of this contract i.e., material provider quotes, is a great idea and should be acceptable although this will require some specific verbage that I'll need to figure out as well as providing supplier price quotes as an attached exhibit in the proposal.
Any further input would be greatly appreciated!
Thanks
Phil
Hold on a minute.
This board always looks to the contractor in my view, but anyway let me give you a problem to work;
Im approved for a loan for 100,000 and it has to come in for that . Im taking bids and its your turn but you dont know that number cause Im not giving it to you. You hit me with an estimate of 100,000. Doesnt matter I guess whether you knew it or not for the problem. You could have come in at 96 , wouldnt matter. Then you give me a price increase fluctuation and Im scared of you cause I need a fixed price for the loan. If youve ever been involved with lenders and Im sure you have , they dont like changing numbers "up" after the loan is set . I fully well know that too and refuse to think about asking Mr banker that things have changed after he loaned me the money. Ill keep looking for a fixed price within 100,000 and rightfully so.
I dont work in this area so I dont know . Will the suppliers not lock in pricing for 90 days ? Thats one option if in fact its a reality.
As someone else said , Ill take it for a price which would also mean that if it dropped he would make more profit . After all gasoline dropped here by .75 cents per gallon. If you had bid gasoline at 3.50 figgureing more increase you would be cutting a fat hog right now. So you bid strand board products at a 35 percent increase and meanwhile they lift the duties from Canada and you pick up 50 percent on the framing package because you increased that by 25.
I know you all will tell me Im off the ball of the real thing but not at my house.
What would you do with me , walk? lol.
Tim
You and I have messaged about some of this before, so you know I don't bid, and that I work with more flexable bankers, so this is acadenmic for discussion...but I would need to know the budget to work with you. if you are hiding the fact you have a firm set limit, too bad. Work with me though and we can do several things. have some optional set-asides or price cutter options lined out as a plan B, budget in a reasonable contingency amt in the est., be ready to paint it yourself since you are a painter, etc.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
The NAHB addressed this at least a year ago and suggested language that can be inserted into contracts.
Basically, it identifies unit prices for volatile materials, used in the bid at contract time, and says that change orders are to be used to cover differences in prices paid versus those bid.
The only clean way to do it, from the views of both buyer and seller (owner and contractor), is for the contractor to state not only the as-bid unit prices but also the quantities, plus the vendors used. The quantities should be fixed, i.e., if you bid 203 sheets of Advantech but blew the takeoff, you should only charge for the escalation on 203 sheets. The language states that quotation and invoice backups are to be supplied.
For a contract I am doing now, I used this clause and identified how many total bf of framing lumber I had, plus all sheet goods that were in the enclosure package. I should have included gypsum board but I did not.
Prices can move up, but if bidding is done at a time during a big spike up, they can also go down. Your language should allow you to get your margin on increases, but to be fair to the owner, it should also have you giving up margin on decreases.
When going back and rereading your post, I see that you are talking about how to do this at proposal time. I suggest that for your next proposal, you get the language down that you wish to use, and write it accordingly. But, when presenting your proposal (in person, of course) you provide concrete examples of what kinds of price movement has taken place in recent times, and using that data, show your prospect what kind of numbers might result for the job in question.
Owners would probably balk and not want to accept this for every kind and quantity of material in a job. You should take care to only identify the significant items that have price volatility, and bury in your bid enough to cover the escalation that can occur for the other things.
Edited 10/31/2005 2:09 pm ET by Stinger
use
"material price subject to cost in effect at time of purchase"
it covers both ways.
JLC has had some articles addressing this within the last year. Some contract wording examples were included I think.
Bought some cellulose today, up $.50 a 25 lbs. bag.
I noticed HD has raised theirs from low $7 to current $8.90 for a bale that is only 22 pounds.
Anybody looked at romex lately? 30%?
Joe H
Formerly in the floor covering distribution business, we indicated all prices were subject to change due to manufacturer increase and any fuel surcharges on every price list. This area is highly subject to petroleum increases.
If we have an attorney on here, it might help with the wording, but spelling out that today's price is based on today's material costbut if it the material is already here and in stock it might be helpful. I think most people realize they are paying for higher material and delivery costs from the manufacturer due to increased gas prices. You name the product, consumers are likely paying more - even if it's just in shipping. If you discuss it when putting together your contract and building the contract right, the customer will likely be more understanding. That would be in an ideal world.
One other thought, could you put in a disclaimer that your contract is based on cost of material and delivery on X date which are subject to increase due to market conditions. The customer has X days to approve or reject an increase voiding the contract? I know the costs to a contractor can change daily on certain items during volitile times and you can be stuck. Not fair, I agree.
Large commercial contractors who called for bid work were clearly told that there could be a possible fuel surcharge (not uncommon during the Gulf War), and material increases would not exceed X% in a 6-month period. I think, but do not know that they build in escalators. If manufacturers already have stock purchased or manufacturered at the lower cost it might be okay. A cost escalation clause of some sort dealt with upfront seems to be the key.
Installation cost should not increase, as it takes the same time and effort regardless. The gasoline to get there could be a factor, so just add that to the bid and if it goes down it's still there. The material and material delivery to where you pick up it is the big variable. If you have old bids out, that are not contracts yet, it might be worth writing the customer letting them know that you are forced to withdraw your former bid due to escalating costs. This is your out if it is a job at a loss.
While your installation cost will remain the same, material will be at market price (like lobster?) and you'd be glad to offer a new bid (limited time with escalators), as you would sincerely like to service the customer, even under unexpected economic conditions. If they really like you and have been dawdling, they might move quickly to avoid possible future increases or because they really need to do the job fast. If they are on a tight budget, they might decide to wait - we all have budgets.
Remember, they selected you for a reason. If some other contractor low-bids, would you rather that they eat the loss and/or pay the interest? Chances are, the original customers may be calling you later. Honesty is something most reasonable folks understand. Approached in a good way, they will understand - they know what they pay at the pump. Most people I know realize that - they may NOT know how far the domino trickle goes. Take proper financial care of yourself and your family as best you can. Trust that good customers will stick with you and do things when they can afford it. Putting yourself at risk financially right now is something you'll be paying for later and possibly with big interest - why not let the customer assume the interest? If you must juggle - today's job pays the mortgage, buys the groceries, etc, do so well. You'll be glad you did.
As a consumer, I'll wait until I can afford the contractor I choose when my budget permits and not take the desperate lowest bid for possibly less than standard work today. These are tough times for you and, for most consumers. Protect yourself where you can. Your well expressed honesty will likely get your farther long-term, if you can wait. Good luck to all of you struggling with increasing costs and contracts that didn't anticipate today's situation, which none of us could. Some of you are in a bad spot and I only wish the best for you and your families. I sure hope we have an attorney on here that can offer the best contract advice. This issue is so very critical and so very unanticipated it requires professional advice. Take care folks.
I think you guys are missing something here. just who do you think your suppliers work for? if there not working for you, get another (they make more every day). I price out every item I expect to put in a house before I bid and my suppliers know that if they tell me a 12 foot 2/6 costs 6.00 then thats all i going to pay for one. a big part of my office managers job is making sure that all invoices line up with the bid price. lumber prices are not our job. get a locked down price before you start, make sure your suppliers understand your policy,get your homeowners on board (surprising how they love being let into this " hard part o your job". go to work, I supply all my owners with copies of all invoices, pass on all discounts and average around 5 mil$ in jobs a year.
Dear Notascrename,
I hope you are not offended by my prior post. I think most honest suppliers honor any written quotes to you as well they should. It also sounds like you are fair and good at keeping track of your costs. That shows you are a good business person and and will be successful.
The person who posed after you mentioned certain materials going up substantially. I suspect much of that is supply and the demand of the recent hurricanes. In other words, the manufacturer made what they expected to sell during a "regular" year. There is not enough to go around in an overactive cycle. In this case, with higher fuel costs, which inpact many home products, from carpet down to the plastic milk jug, consumers are experiencing the unexpected cost increases as well.
Manufacturers are then forced to raise their prices to distributors/suppliers, who must pass it along to keep in the black, unless the suppliers have excess inventory purchased at a lower price. In my experience, unless there is a super deal, the supplier level does not stock heavily on something they have to sit on/pay warehousing etc. for a long time. (They call it something like Turn and Earn). They want to stock only what they can turn over in a fairly reasonable time frame to avoid the warehousing expense and avoid tying up money long term that is needed for other things, like new product investment start-up, etc. For the record, I found that the flooring industry operated on fairly low margins. If they had a price commitment to a large user for a period of time, they ate the loss. Also, as a side note, the mark up that I saw was miniscule compared to, say the garden supply (plants particularly), which in 1979, doubled the cost to the consumer (not a contractor). if you are a supplier operating on a low margin and don't have inventory, with increasing costs from all angles, including health care, you can't stay in business long. Maybe you have had a bad experience with a greedy supplier?
All that shared, it would be wise to get your quotes in writing. For others, make sure you cover yourself in future bids until things settle. If you have a firm commitment from a supplier, they should absolutely honor it if reputable, or at the very least, give you good notice. Contractors are expected to honor their bids and consumers expect that the bid will stick. I'm only pointing out that covering yourself in a legal manner will help contractors be protected from the necessary price increases. Remember, smaller contractors could take a bigger hit if not protected, and some are craftspeople and not business school grads. I just want folks to be paid fairly for their work without going in debt due to unforseen increases and for consumers to pay fairly for material increases. The supplier is not necessarily the bad guy, just someone caught in the middle of a bad scenario, like everyone else.
I did give commercial quotes for a while and I also recognize the folks in production work with a long contract with a builder. The practice at the time I was there was to notify folks in the long term contract/builder situation with advance notice and eat the difference after the increase for about 6 months. Ask yourself what margin you operate on. How long can you take a 3-6% margin, if you are lucky? The "big boys" give their production customers notice (it doesn't matter the trade - most are in the bucket), and the builders would adjust their sell price accordingly - usually without 6 months lead time, they could honor the contract and have time to adjust for the future - if needed. That doesn't even cover the rising cost of benefits for most companies, regardless of profit. Should they lay off people, shut down some warehouses, etc.? This issue affects everyone from the manufacturer down to the consumer. I know it's a Catch-22. I don't know where to draw the line but in my experience the supplier bore the burden.
The only dog in this fight I have is as a consumer, but one that knows the "behind the scenes" issue. I get the program and will choose to pay the necessary dough. Due to this I am likely more understanding than some others. I hope you'll appeciate that your loyal suppliers should stick with you if you have a written commitment and hope they "can" and will honor. I just hope it doesn't cost many people their jobs and benefits as a casualty - we will be supporting the displaced people in some fashion. It seems to me that it's to one must profit enough to cover employee benefits/wage, plus a modest profit during lean times. Look at auto suppliers and airlines. They are going out of business.
My point is that this affects more people than you might know and that your supplier may just be trying to stay in business and take care of their employees and will take a modest profit during hard times. The original point is to take care of yourself, which you seem to be doing well, but others might find themselves in a quandry. I'm most concerned with the quandry folks who need the legal advice I can't offer. I think you'll be fine and just hope you have a little more insight into the supplier end that likely wants very much to keep your business and still stay in business. Hope this helps in some small way. I also hope, sincerely, that this does NOT offend anyone.
I just re-read your message. If you don't like or trust your supplier, by all means change, but if you are a long time customer, you may not find things greener on the other side of the fence. They will promise you the moon, then the honeymoon is over. If that's good enough for now, that's good for you. If you value a long-term relationship, reconciling might be more difficult after the divorce. Different suppliers might promise more than they can deliver, but one has to try it to know. Suppliers may have relationships with the production builders too, regardless of the contractor. It would be wise to investigate that before jumping around - just in case. If there is someone else courting a production builder, they may not accept your new program and take on the new contractor - and be happy enough to stick with them.
That's it for the behind the scenes info. Best of luck to you all. And, the business sense shown by Notmyscrename could be a good 101 business primer. Get it in writing, put in writing, with acceptable legal language, and go forth practicing your trade well. Good Pros are in demand. Again, your professionalism and quality work is golden - as long as you stay in good graces. Loyalty on you part does not guarantee the loyalty of others, but in my case carries a lot of weight. Do great work, use quality products, and stand behind your work. It's hard to go wrong that considered. In anything in life, your reputatation is the only thing you can control and the only thing that matters. If that is good, you have open doors. Wishing everyone open doors!
I'm probably spoiled. never advertised,never built a spec home and average job runs 1.5 to 2.5 mil. my lumber supplier appreciates that 50 to 80k check each month. gc since 74