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You find a project you want to do, cost it out, send your bid to the owner. But before the ink on the bid dries, your material costs rise again. How do you price your work so your bid stays competitive and still lets you keep the profit you know you’re worth?
Where we are
Ken Simonson, chief economist for AGC, asked contractors for examples of materials price increases they are experiencing. The responses he received described blanket price increases of 15 percent a month, specific material costs increases up 52 percent and higher surcharges for deliveries.
Simonson says he sees materials prices overall increasing by approximately 8 percent this year and while costs for some products like lumber have leveled off, rising oil prices are causing construction plastic prices to spike.
For example, Equipment World contacted Lee Supply in Charleroi, Pennsylvania, a supplier of large HDPE and PVC pipes to contractors and municipalities. Jim Murphy, sales manager with Lee Supply for 38 years, says they can only guarantee a quoted price for two days due to the volatility of plastic pipe’s base material: oil.
“I’m afraid we’ll see many more years of construction material cost increases due to growth in China and India,” Simonsons says. “Contractors who can’t adjust their prices may go under, and others may see the prices rise so a high that they don’t bother bidding.”
Don’t sell yourself short
You know what you need to make your nut. Here are some suggestions to help your company tolerate the current materials price volatility.
Have the freshest data
It’s hard to know where you’re going if you aren’t sure where you’ve been. Construction estimating software can collect and analyze your real costs, giving you an actual reference point instead of using theoretical ‘book’ costs. Some examples:
Make price increases part of your contracts
Escalation clauses, often part of contracts for projects that last more than a year, are also useful for short term projects to control material escalation risk. These state if you pay more for materials than the amount specified in the original contract, the customer absorbs the additional cost. When figuring your bid, avoid using a blanket construction cost index because national and regional CCIs don’t reflect localized conditions. Instead, be specific and itemize what products you agree to supply and include benchmark price quotes for each item from suppliers you anticipate working with. Build to your profit goal from actual prices. Expect to provide supplier invoices for price increases and define how and when you will notify the owner of a cost change. Basing your bid on current prices and actual increases, rather than submitting a fixed-rate bid with multiple contingencies, can save you and the owner money.
Stay competitive with contract allowances
An allowance clause sets a pre-established dollar limit allowed for an itemized product or material. At the end of the job, the final cost of materials will be compared with the allowance amount, and the contract will be adjusted either up or down by the amount of the difference. If the costs decrease, the client saves money. And if prices increase, you’re compensated. Contract allowances work for products and materials in which the scope of the work is not fully defined. Write your contract so that your customer has a reasonable expectation that you will keep costs below the allowance.
Check out what local governments are allowing
Some state and municipal projects are including prescribed fuel allowances and material costs adjustments within a specific range. If you’re doing similar work check, to see these bids include and what material costs are typically awarded in that area. The Construction Weblinks site (www.constructionweblinks.com) has a resource section that provides current material costs awarded.
Investigate joint check agreements
Another tactic is a joint check agreement for smaller specialty contractors who may not have enough credit capacity to accommodate unpredictable cost increases. Using the GC’s stronger credit line to strengthen their own buying power, the sub can bid on a project and manage the building materials for the job. The agreement also can give the contractor more negotiating power on prices and service charges.
A joint check agreement works like this: the material supplier, project owner or GC and subcontractor sign a contract agreeing the sub will purchase the materials for the GC’s job from the supplier. Upon invoice, the GC issues a check for the materials payable to both the sub and the supplier. Both sub and supplier endorse the check, and it is deposited by the supplier. If the subcontractor has negotiated a percentage between his company and the material supplier, the supplier then issues a check to the sub. Generic joint check agreements are available at trade association sites like AGC.org, or an attorney can draft the agreement.
Remember time is money
If you’re providing the materials for a project and the start date will be affected by other trades, the ASA Subcontractor Bid Proposal (2008) and the ASA Addendum to Subcontract (2008) includes model language that states, “A change in the price of an item of material of more than 5 percent between the date of subcontractor’s bid proposal and the date of installation shall warrant an equitable adjustment in the subcontract price.” Use this clause to cover expected price increases between the time you submit the bid and the time you actually work the job. The example of 5 percent is just that – an example. Check with your suppliers to see what increases they anticipate they may have to pass along to you down the road. Include a qualifier paragraph stating your supplier has agreed to hold the price for X-number of days with a possible increase or decrease of an estimated percent in the next six months.
Save costs by coordinating material deliveries
Stay in touch with suppliers and avoid the impulse to buy on price alone. If you have storage space at the jobsite and can be flexible on delivery times, you can perhaps negotiate with your supplier to drop or lower his fuel delivery charge if you accept delivery on days when their drivers may already be near your jobsite. Coordinate deliveries with other jobs in the area, taking advantage of multiple pricing for a product and negotiate reduced delivery charges. Fuel surcharges are going to be part of the material costs so consider working with your supplier to build those charges into the cost of the product whenever possible, especially in situations that require the project owner to accept the lowest bid or the bid with the least restrictions.
Ken Simonson, chief economist, Associated General Contractors of America, www.AGC.org
Jim Bartsch, director marketing services, Construction Financial Management Association www.CFMA.org.
David Mendes, senior director, American Subcontractors Association, www.asaonline.com
Diane Dennis, director, www.TheContractorsGroup.com
Steve McGough, chief operating officer, HCSS, www.hcss.com
Justin Heitmann, Bid2Win, www.bid2win.com
Maxwell Systems, www.maxwellsystems.com