By Joel Massey, NexGen Roofing
Lumber. Insulation. Steel. Gas. Unfortunately, current rising material prices, tariffs, and disruptions in supply chain could mean your project just got a lot more expensive! But what does this mean if price escalation occurs and your community is already under contract for a large construction project?
Most construction contracts include provisions to protect the company from circumstances outside of their control. These circumstances include: labor strikes, weather events, acts of God or acts of war, and material price escalation. Material price increases in the construction industry are very common and materials can increase in price, on average, 5-7% each year. For the smaller and more frequent price increases, contractors plan the material price increases ahead of time and figure the additional costs into their estimate based on start date and potential completion time. However, if the project start date is delayed by the community, then the community may be liable for additional fees or surcharges. These surcharges and fees can range from 1-2% of the contract price for each month the project is delayed, so it’s important to understand that “time is of the essence,” adhere to project start dates, and avoid these additional fees.
In rare cases of extreme price escalation, most contractors have a provision in their contract to protect themselves if material prices increase beyond a certain pre-budgeted margin. For example, the price of lumber has increased 288% percent in 2021. Prices for oriented strand board (OSB) are selling for roughly $65-80 per sheet. If the contract was executed prior to lumber inflation, the dramatic price increase would allow the contractor to terminate the contract without liability; however, the contractor must meet certain conditions to justify terminating the contract. For example, if the contractor had ample time to purchase materials prior to the price escalation, then the contractor could still be liable and pay out of pocket for the increase. Timeline clauses work both ways for the customer, and the contractor deadlines are equally important for the contractor to ensure their scope of work and pricing is met.
If your project is related to an insurance claim, insurance carriers may update their price lists to current market conditions and pricing. Waiting on approval from the insurance carrier is half the battle when it comes to insurance restoration work. Sometimes these price escalations can happen when waiting for approval on additional construction items related to the claim. If this is the case, then your carrier understands the market conditions and will typically allow the approval of the price increase; however, this also depends on following reconstruction timelines set forth by your carrier. If you wait a year or two to start the work after the claim, and supplement items have been approved, there is a chance your insurance company may deny the additional benefits. We recommend contacting your insurance carrier to review your policy and guidelines regarding material price increases, and their timeline to file and complete a claim.
Material price escalations are also very hard on contractors. These unforeseen increases in pricing puts contractors in a tough position understandably, not only the value of maintaining a relationship, but also honoring the price set forth at the time the contract was executed. We understand the potential burden it may have on a community who set an expected budget and now may be subject to additional costs or change orders. Having and maintaining an open conversation with your contractor is the best way to resolve any of these dramatic material price escalations. Understand the terms and conditions up front in order to protect your community from additional fees, change orders, or potential cancellation.
Joel Massey is the Co-Owner of NexGen Roofing, specializing in multi-family and commercial roof replacement in Denver and the surrounding areas. NexGen has been operating since 2014 and is listed on the Inc. 5,000 fastest growing companies in the United States.
