Rising materials costs have become a persistent challenge for construction companies of all sizes. But they hit small to midsize businesses especially hard. Your profit margins can quickly shrink or vanish altogether when the price of lumber, steel, concrete or other essentials spikes.
Although these cost pressures are largely beyond your control, how you plan, price and manage projects can make a big difference. You may be able to push back against the worst effects on your bottom line by taking practical steps to anticipate and adapt to volatile materials prices.
Communicate proactively with suppliers
Outside of any specific project, a good first step is to develop and maintain strong relationships with your suppliers. They can help you stay informed about tariffs and other developments that are driving up the cost of materials. Ask suppliers whether they offer any programs that let you lock in prices for a specified period.
Another topic to broach is whether you might buy bulk materials in advance. This is generally a viable cost-control measure — but only if you have adequate storage space and relatively predictable needs. You must carefully weigh the cash flow impact and the ongoing expense of safely storing all those items.
Review bidding practices
Your bidding practices can also help you strategically address high materials costs. One option is to build some cushion into your bids to account for the risk of price hikes. However, this approach is tricky: If you overestimate the risk, you may lose out on jobs. If you underestimate it, you may undermine your profit margin. Another option is to consider bidding on smaller, short-term jobs. These tend to be less vulnerable to fluctuating materials prices.
When possible, identify price-volatile materials as separate line items in your bids. Doing so allows you to adjust for changes more easily and helps owners understand how materials costs affect total project pricing. In addition, if you’re not already, use real-time pricing data. Instead of relying solely on historical cost estimates, incorporate current supplier quotes or market indexes into bids. This can make estimates more accurate and defensible.
Shift risk in the contract
Among the most effective strategies is to shift some risk to the owner (or general contractor) by negotiating a provision in your contracts that adjusts the price periodically to reflect fluctuations in materials costs. This approach protects you financially while keeping bids as low as possible. And because there’s no need to build a cushion into bids to absorb the risk of price volatility, the owner benefits from a lower initial contract cost.
Often, these provisions are referred to as “escalation clauses” because they target rising materials prices. But such clauses are more palatable to owners if they also provide for downward adjustments in the event materials prices fall.
It’s important to design escalation clauses carefully, paying attention to price adjustment triggers. Contracts will commonly provide for an adjustment if materials prices rise or fall by 2% or 3%, as substantiated by supplier invoices, one or more published price indexes, or some combination of the two.
In addition, the clause should specify when price adjustments are to be made — for example, at the end of the contract or at fixed intervals (such as quarterly) throughout the contract. Work with your attorney to ensure that an escalation clause achieves your objectives and that no other contractual provisions override it.
Ask for help
Cost volatility is an unavoidable reality in today’s construction industry. However, it doesn’t have to completely undermine your company’s profitability. Need some help? We’d be happy to assist you in analyzing materials costs, identifying cash flow and tax strategies to offset price increases, and modeling “what if” scenarios to guide smarter bidding and buying decisions.
