Here We Go Again

The economic volatility we are currently experiencing is directly impacting prices in construction. I initially thought the biggest concern was the steel and lumber pricing due to the tariff war. In conversations with members, I hear that prices for many commodities are increasing rapidly and in percentages we saw in the pandemic. Suppliers are telling me freight is skyrocketing. And some manufacturers and distributors are returning to “quotes good for 1 day”. Here we go again.

Changes to pricing are part of the industry, right? Except the average swing is about 10%. If the increases go higher, you are losing money. During the pandemic we know force majeure language was taken out of contracts and price change orders were denied. This left contractors holding the bag on the escalation. We saw members close their doors due to not getting paid for costs during the pandemic and many others are just returning to even.

What can you do? I recommend you work with your attorney before signing those contracts. Price escalation clauses are an important option to protect yourself. The clauses can be written to address issues like:

• • • What is covered and how to calculate the adjustment
    • Thresholds to trigger an adjustment and a maximum cap
    • If there is a downward adjustment (up and down adjustments share the risk equally between owner and contractor)
    • What is required for documenting the adjustment
    • Impacted delivery schedules if product scarcity occurs
    • and more

I heard this week that general contractor’s attorneys are incorporating strong escalation clauses into their contracts. As subcontractors, please consider doing the same. To learn more about how these work, Procore has a great article breaking down escalation clauses. You can read it here.

I have been proactively talking with many owners, noting that this industry cannot be responsible for assuming all the risks – again. I can do nothing more than advocate and hope they hear me. However, these owners are losing their funding levels, leaving little appetite for solutions. The rigid “you signed a contract at this amount, and you are required to honor that” consequences are just around the corner. This isn’t a “wait and see which materials will go up” moment. This is a “protect yourselves through your contracts” moment. Please work with attorneys, generals, and owners to ensure you are prepared. I want to see you all in businesses next year and better yet, find you profitable.

— B