Price Increase Protection

May 22, 2006

Protect Yourself Against Material Price Increases

By: John Zink
VP of Education and Programs
PHCC Educational Foundation

With the fluctuations of copper,steel and other material prices, many contractors have been caught buying materials for much more than what their original estimate covered. Here are some strategies to control your costs and buffer yourself against price increases.

Read the newspaper & watch the news.
Keep an eye out for stories that can give you advanced warning of price increases coming down the line. News stories about the price of oil rising to all-time highs should give you an idea that higher gasoline prices are to come.

Analysts may not have had a handle on just how fast the rise in prices of oil and copper were going to be, but paying attention to the news could have given you some warning before you started getting the new price lists from your wholesaler every couple days.

Build price protection into your contract.
Restaurants have no problem offering lobster at "market price" on their menu. You will pay whatever the price is that day or you don't get to eat lobster. Owners who want you to hold to your outdated materials prices are like retaurant patrons demanding lobster today at last week's price. The difference is that if you signed a poor contract, they might be able to demand that you take the hit for rising costs.

Work with your attorney to create a materials pricing escalation clause and get it into your contracts as a way to shift your risk back toward the owner. If they want the project to be completed, they are the ones who must bear the burden of risk of material price increases--NOT YOU!

Offer the option of locking in prices
Give the owner the option of purchasing all the job materials at today’s prices. To receive this benefit, they must pay all materials purchase costs up front, plus pay the real costs for storage and extra materials handling that will be incurred.

Partner with your supplier.
A great way to protect your profits is to have a close relationship with your supplier. That means you should look for the supplier that offers you the best value and service for the price, not just the cheapest guy in town. A supplier who knows that you are going to use them as your primary (or only) source of materials should be able to work with you to offer purchase options that limit price fluctuations, or at least provide some warning of future price increases.

Submit a change order.
For work that is already in progress, consider submitting a change order if current pricing is significantly different than prices at the time the project was bid. If you can prove that delays caused by other crafts or the general contractor have pushed back completion dates and delayed materials purchases, you may have grounds to submit a change order to recover the price difference an earlier purchase would have made.

Attendees of the PHCC Educational Foundation's Essentials of Project Management Course learn dozens of techniques to boost productivity, reduce risk and cut waste.

Visit the Facts & Stats Archive for Links to past articles.

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