Protect Against Material Cost Hikes

In the construction industry, it often seems as though the only thing builders can count on is that the cost of materials will increase. A range of factors — inflation, tropical storms, rising energy prices, the dismal housing market and weakening economy — all impact the price of building materials by causing fluctuations in supply and demand. The net effect is a seemingly unpredictable effect on a builder’s pocket book. Here are five ways to avoid losing money on materials.

Swap out products
A wide variety of global factors such as demand from China for example, can cause sharp increases in previously affordable, and desirable materials like copper, for example. “It used to be that many homes had copper piping for the supply plumbing,” says Bob Boothroyd, principal partner of the Conn.-based Boothroyd Group. “But copper went up about 500 percent in the last few years,” Boothroyd says, explaining the reduction in the use of copper for supply plumbing.

Now Boothroyd uses PEX tubing instead of copper, which he says is not only less expensive, but also easier to install—meaning installation is cheaper. When possible, you should advise clients to replace materials that are notorious for price hikes due to seasonal demand. Also, look for opportunities where you can make substitutions. For example, substitute engineered wood for lumber or timber when installing a 2x4 or a beam. If you’re not able to keep track of all the products that are on the market, go straight to your source: the supplier. “With a wide range of material options and new products being introduced, builders expect their suppliers to recommend alternatives that can save them time and money,” says Bill Tucker, president of the Florida Building Material Association.

Ask for a quote
It cannot be said often enough that dealers and suppliers play an important role in a contractor’s business. “It’s not just transaction based, it’s relationship based,” Boothroyd says. To prevent the jumps in material prices from taking builders by surprise, the dealer can offer a quote on a specific item, or a whole list of items, meaning that the price on the item is good for a set period of time usually 30 days. If you maintain a good relationship with the supplier, he or she can warn you when prices are about to go up. “There have been times when the supplier has warned me something was going to go up, and I purchased materials a lot sooner than I needed to, but managed to save a lot of money,” Boothroyd says.

Start a bidding war
When preparing for a larger project, consider putting together a list of all of the materials you might need and invite various suppliers to bid on them. In addition to price, also consider other factors that could impact the job such as turnaround time and the reliability of the supplier. Tucker explains: “If a contractor has a framing crew on a job and the crew makes $100 an hour, and they have to wait three hours for the studs to arrive, that nickel-a-stud [discount] didn’t save him money, it cost him money.” According to Tucker, this only underscores the need to use suppliers you know and trust is crucial.

Move for fuel costs
As the price of fuel increases, dealers are passing their increased cost of delivering materials to the contractor. Without a clause in their contract, builders often have to eat the extra costs themselves. David Crump, director of legal research with the National Association of Home Builders (NAHB) says that an increasing number of members have inquired about passing this fuel surcharge onto the homeowner.

Protect against future price hikes
A great deal of time can elapse between the initial bids, the signing of the project and the day the job begins. More than a year can go by, which leaves you vulnerable to price hikes. Including an escalation clause in contracts allows you to pass any additional costs from increased prices on to the client. Some contractors may worry that their clients will view a request for an escalation clause with suspicion, and opt to work without one out for fear of losing business. Crump, who helped draft the escalation clause template for the NAHB’s members, says the association was careful in this regard to establish firm parameters. “This was a way to make it fair to both parties,” Crump says.

When developing an escalation clause, state explicitly which materials are in danger of a price increase and record the price of the items at the time the job begins. Set a certain percentage or a dollar amount that the materials must go up before the client will have to pay the difference. Each contractor might have a different limit. “You have to ask yourself, ‘if this occurred, could I afford to complete the contract?’” Crump says. Finally, the clause should offer a termination contingency, which allows the client to terminate the contract if price increases get out of control. Boothroyd points out that prices also can fall, which benefits the client. “If something goes down, I’m happy to give the consumer a credit for it.”