Contractor Materials Shortages and Materials Price Inflation

1 month ago 3

This post is part of a series sponsored by Old Republic Surety.

The 2021 construction boom is great for your contractor clients, right? Yes, demand is up — but contractors also are dealing with soaring costs and supply chain and workforce shortages, all which threaten their success. Here’s advice you can offer construction contractors, including insurance coverages they should consider.

We all know well that the availability and prices of many of the materials used by construction contractors have been affected dramatically since the start of the Covid 19 pandemic. Many materials are difficult to find, and when they are found, they are at extremely high prices as compared to the cost before the pandemic.

Some of the materials most noticeably affected include lumber, products made from copper, products made from steel, and plumbing fixtures. While other unique factors contribute, the biggest culprits for the volatility are the COVID lockdowns, COVID restrictions, business closures, higher-than-expected demand, and a reduction of the available workforce in the industries that produce and distribute these materials. Some materials that are traditionally readily available off-the-shelf are taking weeks or even months of lead time for delivery.

Contractors may be feeling a big pinch on many of their contracts due to increased material costs, especially on those contracts originated prior to the pandemic. In many cases, materials suppliers will not lock in their quoted prices for the amount of time the contractor needs to ensure the prices they ultimately pay do not exceed those contemplated at the time their bid was made. Some suppliers will not lock prices in for any longer than a week, and some contractors report that certain suppliers are unwilling to lock prices in for more than a day.

Because construction contracts rarely contain language that compensates the contractor for material delivery delays and price increases, contractors usually bear 100% of the risks associated with delivery delays and increases in material prices. Additionally, the longer the duration of the contract, and the longer the time before materials are ordered, the greater the risks to the contractor.

What can a contractor do to mitigate the availability and inflation risks associated with materials?

Here are some thoughts to consider:

Carefully review the bid and contract documents to determine the extent, if any, to which the contract would provide relief to the contractor for material availability delays and price increases. Consider engaging the services of an attorney who is expert in your area of construction to assist you. Negotiate language into your contracts that provides extra compensation if material prices rise between the time the contract is signed and the time the material prices can be locked in. While each type of material may be different, such compensation increases may be tied to a price index of a particular item or perhaps to the actual price paid to the supplier.

Your attorney and the trade associations within your particular industry are good resources to seek for assistance in effectively drafting such clauses. To help ensure that you can perfect a claim for additional compensation, be sure to keep thorough records and documentation of quotes and communications with material suppliers.

Additionally, such contract language should provide for an increase in the time allowed for completion of the contract in the event of materials delays. The benefits of additional compensation will be offset if material delivery delays cause you to have to pay a penalty for late completion. Even if you fail to obtain additional compensation for material increases through a change order you may be able to obtain an extension of the completion time due to delivery delay.

Adjust your bid or decline to bid? Unfortunately, public owners are rarely willing or able to make changes to contracts to allow for additional compensation for the impact of material availability and price inflation. You can ask, but in the absence of such relief being available, you can either decide not to bid the project or determine an amount to add to your bid to (hopefully) cover any additional costs resulting from volatility in availability and price. Offer owner potential savings. When negotiating material volatility relief into a contract, consider providing savings to the owner if actual material costs end up lower than the amount that was bid. Giving the owner the potential of savings might help entice them to agree to a material availability or price inflation clause. Try suggesting alternative materials that are more readily available and less price-volatile, such as a different type of exterior siding, different plumbing fixtures, or metal vs. wood framing. However, alternative materials may not be appropriate, so do not proceed without written approval from the owner. Get it in writing. Be sure that any relief that you do agree upon with an owner is spelled out in fine detail and put in writing as a part of the construction contract. A verbal or email agreement from the owner may later be disputed, especially if the owner is looking at a sizable additional outlay. Buy now, delivery later? Some owners will allow a contractor to purchase materials up front, to lock in prices, and will pay the contractor for the stored materials prior to incorporation into the project. Make sure this is clearly detailed in writing in the contract. The contract should also address what would happen in the event of a change in scope that results in pre-purchased materials no longer being needed. Be tenacious. If you experience significantly increased material costs on a contract that does not contain any provisions for cost relief, don’t give up. Check to see if there are any other circumstances that may lead to a valid claim, such as if the owner shut the job down for an unreasonable length of time, causing a delay that resulted in the extra costs. Consultation with legal counsel can help determine the quality of your claim. With the increased cost of most construction materials, it is important that you increase security over your materials, both on the jobsite and at your shop. For example, while many potential thieves previously paid little attention to lumber sitting on a jobsite, they might act differently when a 2″x 4″ is worth $10. The damages from materials theft are not only the direct cost of replacing them, but also additional costs resulting from reduced labor productivity and from delays in completion of the contract. Additionally, while carrying employee dishonesty insurance has always been prudent, it is now even more important to consider.

There are some signs of availability and price relief starting to surface. For example, lumber commodity prices have fallen 46.7% in the six weeks since their peak on May 7, 2021. However, this drop has not yet translated into more than a very small reduction in the prices that contractors are paying.

While most experts predict that within a few years material availability and prices will return close to what they were prior to the pandemic, the path to that point will likely continue to be volatile. As we have heard said many times during the past 15 months, we are living in very different times, and while we have ideas about what the eventual outcome will look like, only time will tell.

These risks associated with volatility in the availability and pricing of materials are serious threats to contractors’ success. However, there are actions that you can take to minimize these risks. It is important to negotiate with great care, utilize the assistance of your trusted advisors, and pay close attention to the details.

If you have any questions about anything regarding surety, contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.

Topics Contractors

Mike Sanders, bond manager, Old Republic Surety

About Mike Sanders

Since 1999, Mike Sanders, bond manager, has overseen the underwriting and operations of the Milwaukee Contract Branch office. From 1992 until 1999, Mike held responsibilities in another of our large branch offices, working with both contract surety and commercial bond business. Mike launched his surety career with Aetna Casualty and Surety Company, where he handled the marketing and underwriting of all lines of bond business. Mike holds a bachelor’s degree in finance from Drake University and has an Associate in Fidelity and Surety Bonding (AFSB) designation.

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