I have read a few posts over the last few months relating to escalating material costs and various ideas on how to deal with this. The general theme seems to be "how can I accurately bid something when I don't know what my cost of material is going to be".

I have largely absorbed all of the material increases by either substituting lower cost materials or simply accepting less margin. However, we have a job now where the cost of material doubled in the 12 months since I quoted the job and it will end up costing me about $20,000 on a $270,000 project. The stance of the owner and contractor is that we signed a contract almost a year ago and we should have bought the material at that time. But this was 80 sheets of material and if I were to have to pre-buy all the material for every project a year in advance we would need a 20,000 square foot warehouse to store it all. That's simply not going to happen.

For those of you in similar situations that bid large projects months or years before production, I wonder how you have been dealing with this? One idea I'm considering is writing into our Quote something to the effect "The price quoted is good for 30 days. All prices quoted will increase at a rate of 1% per month until..."

I haven't decided when the price would lock in, whether that's when they award the contract or production begins. If they award the contract a year in advance or if they award the contract and the house is delayed 6 months (as was the case with the aforementioned job) then the contract clause accomplishes nothing. Thoughts?

This topic has come up several times here. In my honest opinion, being a small shop, but dealing with similar issues (usually on approx. 100K projects) is your clients will likely only accept a solution where:
1. You either purchase all the material at the onset and work out with your vendors a timed release of said material as you need it (meaning your vendors purchase and warehouse the material or take on the risk of future cost increase or reduction).
2. You build into your bid off site storage of the material for the entire project if you do not have room to handle it in-house. This also has the caveat that your bid and deposit structure must include locking up all of that investment.

No customer that I have ever come in contact with is going to accept an open ended option to change pricing based on material costs at your time of purchase. Locally we have had several massive projects (that I am not involved in thankfully) where prices bid could not be honored at the time of need and contractors simply walked away even under threat of legal/bond issues. There were soaring steel prices, drywall, fuel, you name it. In the end these contracts were renegotiated however its a painful process that leaves pretty much no one making any money.

If you want to honor your bid, in my opinion, you only have the option of purchasing or locking in the purchase of all possible materials at the onset. For us it has meant being firm with our deposit structure which is far more aggressive than any of our competitors for the fact that we DO procure all material ahead of time.

Its still no guarantee. We are just coming out of a crippling project where we took deposit on all materials, placed P.O.s and then our vendors drug out and could not source product endlessly which left us sourcing alternate vendors at different pricing or waiting for committed vendors to come through. Sadly in my world they hold the cards. They simply reply with "they are still sourcing material" as weeks pass. We wound up having to abandon a steel supplier and source material freighted in at our expense as well as a hardwood supplier in the same boat all of which crushing the schedule.

The unfortunate fact is unless your some massive customer to the source you have very little recourse to demand supply or compensation for lack of supply and I dont think your going to have an ounce of success with any open ended option for price increases to your customer. They are operating on a fixed budget just the same as you are and when your awarded the project its yours from that point forward unless you can burry problems in CO's which is a shady risk.

Mark,

Thank you for the response. I have had a note at the bottom of my quotes for the last 30 years that states prices are good for 60 days. I have never before needed to make use of that clause. I'm sure I'm not the only one to include such language. I suppose the recourse is that we have the option of saying that our quote is no longer valid because 60 days has passed and we wish to re bid the job. At which time the customer can either choose to accept our new price or open the job up again to other bidders. My interest in including the 1% escalation is based on the idea that the scenario layed out above would be far more uncomfortable than knowing ahead of time they need to allow for price increases. Obviously we are dealing with unprecedented price escalations that have not occurred in the last 3 decades I've been in business. Perhaps this will work itself out and not be an issue moving forward, but if it does it seems to me that yesterdays common practices no longer apply and we can basically introduce whatever new ideas we need to in order to protect ourselves.

My response really had nothing to do with quoting. Several of my vendors are quoting on 1 week. Not 60 days. Their number is good til the end of their week (whichever day that may fall on, and thats it). Bidding and quoting is a different story.

I may have misread but I was speaking moreso to your 80 sheets at the time the job was awarded.

I dont disagree with you with regards to unprecedented times and moreso that this should be yet another opportunity for the low man on the totem pole, who really holds all the cards of the project moving forward, to be able to turn the tables on slim/low deposits, unrealistic payment structures, and so on. If these jobs want to move forward shops have to start defending their increases instead of absorbing them.

I recently had a job ask for financial compensation for supply side delays in the project. No vendor of mine is offering me an XX% discount because they are late or cant find material. But it all falls on the small shop and the problem is we have always conceded and either taken less margin, issued credits, and so on. Poop flows downhill and me being on the supply side the only person downhill of me is their installer.

I feel like I have been in a lucky situation in that I came into a lot of this with some foresight of some good mentors and a lot from this forum and I have always stood my ground with regards to deposit structures. Im not the bank. But even with all that, the past year has been brutally hard.

To me your main hope is that your not in a Campbells soup competitive market commodity (let the guys beating themselves to death making Plam cabinets battle at the bottom) and you can set your structure so it works for you and your not broke waiting on final. Either that or have the ability to walk away from the big ones that refuse your payment structure.

When I started out, I broke out my quotes based on labor and materials. UNTIL smaller customers resented that I charged that much for labor. They wrongly assumed labor was profit. So to prevent that problem my quotes were just one number. But with the volatility of the supply chain and rapid material cost changes, that may need to be changed. You can give them a longer term on the labor costs, but material quote is a short term number. Unfortunately, GCs and some customers have always considered small companies as their banks, and the last place to send a check. "You need me more than I need you" thought process. Only ones that have it worse are any countertop shops. Those pour guys are in a horrible situation!

I'm curious, what's the story with countertops shops?

I have recently used several granite countertops for a few projects and was surprised how cheap it turned out, regarding that they took out old countertops, installed new ones (with sinks included) and took care of disposing the old ones. And the work was of a very good quality.

The countertop guys are the last one in on a job. Most jobs are at deadline or late, and these poor guys have little time and usually work overtime to meet that short deadline. First subs on site have the most flexibility, last ones in get hammered on labor costs. Sorry, I thought my post was getting too long and didn't use enough words to finish.

Unfortunately once you sign the contract there is not much you can do. But my question is why is it taking a year after you signed the job to get going.
So talk to a good contract lawyer about language that can be put in the contract at time of signing.
As for going forward on this contract I would put the screws to them big time on any change orders.

OP doesnt say its been a year since they signed the contract. It says 12 months since the job was quoted.

No doubt it seems easy for many to fall into the routine trap of a bid is good for XX days and then get stuck. Who knows when the contract was actually signed or when the job was awarded in relation to the 12 month old quote.

Its a good heads up for anyone to re-evaluate your contractual terms as they pertain to bidding and deposits. Labor costs are a bit less volatile but materials are a boat anchor around your neck not only with regards to cost but with regards to availability.

Sorry, my bad, I read that wrong,
I have a clause with an expiration date for any quotes I do. It is there to compensate for variances in material costs, but also for scheduling. I have a pretty good idea of what work I have on hand in the next couple of months, but who knows 12 months from now how much more work I will be able to do.

Sorry, my bad, I read that wrong,
I have a clause with an expiration date for any quotes I do. It is there to compensate for variances in material costs, but also for scheduling. I have a pretty good idea of what work I have on hand in the next couple of months, but who knows 12 months from now how much more work I will be able to do.

It is an issue for sure. My better GC will always ask when it is time to sign the contract if there are an additional cost overruns, my not so good ones do not. I simply do not sign my contracts when there are sent to me, but I wait until it is time to sign them, when shop drawings are due and the project is up and running and you can tell when you will actually have to deliver product. If material prices have changed (gone up to much) then I notifiy them that I will not be able to sign the contract and preform the job. They might get pissed at you for a while but they will always ask you to bid future work. I had one tell me that I could not do that to them, that I must honor my price, then I reminded them about the time they pulled a trim installation contract out from under me three weeks before the start date. I sent copies of all the e-mails to the owner of the company and asked his opinion. Believe me when they don't send you a contract when you are expecting it they are out shopping your prices, why should not it work the other way around? They are out looking for there best interest and you should do the same and looking out for your ass not theirs. If they can not pay for the additional cost of the material price increase then I tell them I can not do the job. When they go somewhere else do you not think they other millwork guy is going to put those increased costs in his budget?

In the middle of covid shut down we had a local government project. I went to the Gc and told them that supply chain issues were bound to arise and told them I wanted to purchased all materials, store them and bill them for stored materials. They went to the local authorities and they thought that it was a very good idea. I purchased all the materials stored and billed for them with my mark-up. That was a very good month. It sucked when we got to the end of the job and I had already taken 50% of the profit out of the job.

I can relate to this from a machine supplier standpoint and tell you what we have done. It's applicable to any manufacturer.

1. Quotes are good for a shorter period of time and the explanation is given to the customer as to why this is the case. People tend to believe a short quote period is unnecessary pressure to decide right now but as manufacturers and distributors we understand the fluctuating prices of materials. I try to be transparent with pricing.

2. Factor in additional cost that you anticipate as possible. On the machinery side we deal with rising costs of machines but also have to account for fluctuating exchange rates and shipping costs. There was a period of time if we paid $100K to a vendor they received 83K Euros. Currently things are to our advantage, and we can receive close to 100K Euros. This won't last forever though and I'm just waiting for the shoe to drop. I let customers know we are quoting based on lower exchange rates but offer a discount that reflects current exchange rates. We don't want to completely rewrite pricing because we know the current exchange rates won't last but we feel it's an honest thing to offer the discount. Shipping rates for containers have doubled in the last 16 months. I would love to see it come back to normal numbers, but I doubt it ever will. Shops have to pay for shipping but also have to account for higher delivery rates, so we are all in the same boat when it comes to accounting for these additional expenses.

I'm curious for those who have decided to purchase material early, how are you ordering material so early on the project...before shop drawings and field dimensions? How are you getting an accurate BOM? How much extra material are you buying to cover this that eats up your profit? Or are you having to purchase twice? What you think is safe, then order the rest after everything is engineered. Seems like a hassle.

All of our estimates are good for 30 days, and we have a line in the estimate that states "this proposal is contingent upon a mutually agreeable subcontract that includes a material escalation clause"

We haven't had to use it yet, but its there if we need it.