Material Price Hikes
The construction industry is no stranger to unexpected challenges, and one of the most unpredictable factors contractors face is the fluctuating cost of materials. Tariffs, supply chain disruptions, and market conditions can all drive up prices, leaving contractors scrambling to cover unanticipated expenses.
If you’re a contractor, being caught in this situation can eat into your profit margin or even turn a project into a loss. However, there’s a strategy you can use to protect yourself: the price escalation clause.
Including a price escalation clause in your bids, proposals, and contracts can be a game-changer when it comes to safeguarding your bottom line. Let’s walk through how to use this clause effectively to ensure rising material costs don’t derail your projects—or your profits.
What Is a Price Escalation Clause?
A price escalation clause is a provision included in a construction contract that allows for adjustments to the agreed price if the cost of specific materials increases beyond a certain threshold.
Typically, this threshold is set at 2-3%, though you can tailor it to suit the specifics of your project. Essentially, the clause protects contractors by shifting the financial impact of material price hikes onto the project owner.
This ensures that if a tariff or market shift drives up the cost of key materials, you won’t bear the financial burden alone. Instead, you’re entitled to submit a change order reflecting the additional costs—with proper documentation, of course—and adjust the contract price accordingly.
Step 1: Add the Clause to Your Bid or Proposal
The first step in protecting yourself is to include a price escalation clause in your bid or proposal. This signals to the project owner from the outset that rising material costs could lead to price adjustments down the line.
The language in the clause should clearly state the conditions under which price increases will be applied—for example, “If the cost of [specific materials] rises by more than 3%, the contractor is entitled to adjust the contract price to reflect the increased expenses.”
Why include it upfront? Because if this clause is absent from your bid or proposal, you may not have leverage to add it later. By making it part of your initial submission, you set expectations early, which can help avoid disputes if prices climb.
Additionally, adding this clause gives the general contractor (if you’re working as a subcontractor) the opportunity to include the same language in their contract with the owner. This way, the project owner—not the contractor or subcontractor—is responsible for absorbing increased costs.
Step 2: Make Sure It’s in the Final Contract
Including a price escalation clause in your bid or proposal is only half the battle. Once the project is awarded, it’s critical to ensure the clause is carried into the final contract or subcontract.
Here’s why this matters: language in a bid or proposal alone isn’t legally binding. If the final contract omits the price escalation clause, you won’t have the right to adjust your fees later. To avoid this pitfall, carefully review the contract before signing it and confirm that the clause is included, properly worded, and enforceable.
Don’t hesitate to give us a call at 713-715-7334 if you need help. A well-drafted contract can mean the difference between protecting your margins and losing money when unexpected costs arise.
Step 3: Document and Submit a Change Order
If tariffs or other factors cause material costs to rise beyond the agreed threshold, the price escalation clause gives you the right to request additional payment. However, you’ll need to follow a formal process to enforce the clause. Here’s how:
- Gather Evidence: Collect documentation showing the increased costs. This might include supplier invoices, price indexes, or written statements from manufacturers verifying the price change.
- Submit a Change Order: Provide a clear, detailed change order to the project owner or general contractor. The change order should outline the impacted materials, provide proof of the price increase, and calculate the resulting adjustment to the contract price.
- Follow Up: Be prepared to discuss or negotiate the change order if needed. A fair and transparent process will increase the likelihood of the change being approved.
Protect Your Business from the Unexpected
No contractor can predict how tariffs or other economic factors will impact material prices during the course of a project. But with strategic planning and the inclusion of a price escalation clause, you can protect your business from sudden cost spikes that could jeopardize your profitability.
By taking these simple steps—incorporating the clause into your bid or proposal, ensuring it’s in the final contract, and following the proper protocol for submitting change orders—you’ll be better positioned to weather unforeseen price increases.
This not only preserves your profit margin but also helps maintain a positive working relationship with your clients by addressing cost issues transparently and professionally.
When it comes to construction, it’s not just about building structures; it’s also about building safeguards. And a price escalation clause is one safeguard no contractor should go without.
