Over the last year, material prices have steadily increased, and it looks like they will continue to do so for the foreseeable future. More recently, materials are also becoming increasingly scarce, with everything from drywall mud, to paint, to lumber. Earlier this year I shared an article about using price escalation clauses to account for material price increases, but I wanted provide some more direct information on how to manage both cost increases and delays.
The best way to do this, and in some cases the only way to do this, is through your contract.
Accounting for Cost Increases.
To account for material or labor cost increases you can shift all of your work to a cost-plus model, and use a cost-plus contract that requires the customer to pay for the actual costs.
If you prefer to provide flat fee contracts (this is the most common type of contract in construction), then you may be better served by adding a price escalation clause into your contract. This clause can cover all cost increases incurred between contract signing or bidding and the time of purchase. It can also cover only costs related to certain categories of items (such as lumber or concrete). It can also only be triggered in the event a cost increases above a certain percentage from its cost at the time of contract signing or bidding.
These are just some of the options, and they do not have to be one-sided. You can also have them drafted such that if prices decrease, your customer can share in the benefits of that. In either case though, you will have to open up your books and/or estimates to a degree to allow customers to see what the estimated or budgeted costs were and what the actual costs are. So it is important to draft these provisions carefully and thoughtfully.
What About Contracts Without Cost Increase Provisions?
For existing contracts that do not have a cost escalation provision, it can be difficult to renegotiate. My suggestion is to have an open discussion with your customer and see if you can have them agree to participate in the costs. If their option is to have you be unable to complete the contract, or complete it at a slightly higher cost to them, hopefully they proceed with the second option. Be sure to document any modifications like this through a change order or addendum to the contract. At the same time, be careful about pushing too hard to have the customer pay for increased costs. You still have a written contract and that cannot be easily ignored.
Accounting for Unavailable Materials.
In addition to cost increases, certain materials are becoming scarce or with extremely long lead times. You want to make sure your contract has a provision that makes it clear you are not responsible for delays caused by material shortages, shipping delays, or similar events. In the same vein, you also want to make sure your contract indicates you are entitled to extensions of time for these delays and reimbursement for additional costs due to delays. If your contract already has this type of provision, then you may be able to use that provision to recover some cost increases for materials that are also delayed in delivery. Be sure to give your customer notice that materials are delayed and that you intend to rely on this provision.
If you do not have a provision like this in your contract, you should still give your customer notice of delays in materials for the project. If the delay in materials makes it impossible for you to perform the contract, you may be excused for those delays in the event a dispute arises with your customer regarding it.