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Skaer-Tactics: Sign of the Times Is Material Price Volatility

June 2, 2008
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Material shortages and price escalations plague the construction industry. As many as two-thirds of general contractors and subcontractors, which include HVACR contractors, said that shortages and price increases eroded their bottom line, according to the 2006 Construction Financial Management Association (CFMA) study.

The study showed that steel and cement materials in particular were in short supply, creating a high demand. As material price volatility becomes persistent and more normal rather than an exception, members of the Mechanical Contractors Association of America (MCAA) are calling for support in addressing ways to equitably share the risk of hyper-volatility in construction contracts.

Members can go to www.mcaa.org/private/procurement for new information, including a succinct analysis of the issues, material price volatility, and contract clauses allowing cost adjustments in cases of extreme volatility.

More and more contractors are putting a material price escalation provision in their contracts. The premise of the material price escalation clause, of course, is the risk that a significant change in the cost of the material would be borne by the customer, not the contractor.

These clauses simply state that if a contractor must pay more for the materials than originally specified in the contract, the customer will absorb the additional cost. Typically, escalation clauses require proof that the increase is due to a price increase instead of pricing error on the part of the contractor.

It is clear that the price volatility of construction material will be a continuing challenge. The contractor’s best defense is to be informed and to negotiate contracts wisely. If you have any suggestions on beating the system, we’re all ears.
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