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HOW TO DEAL WITH MATERIAL SHORTAGES AND PRICE INCREASES

RISING MATERIAL PRICES & SHUTDOWNS CAUSE DELAYS FOR CONSTRUCTION PROJECTS

Lumber prices are higher than they have been since 2018, according to NAHB. In fact, the Random Lengths Framing Composite Price is up 50% since April 2020.

Higher prices for construction materials, combined with the shutdown of manufacturing plants and lumber mills because of the Coronavirus, are causing delays in the supply of construction materials.

Although many states and jurisdictions deemed construction essential, supporting businesses like manufacturing, trucking, and suppliers were shut down to protect employees from infection or transmission of the virus.

 

CONTRACTORS WILL LOSE MONEY WITHOUT THESE CLAUSES IN THEIR CONTRACTS

Now that many project sites are back to full operation, the delay in construction materials and the rise in material prices are eroding profit margins for many construction businesses.

If you want to protect your profits against fluctuating material prices and schedule delays beyond your control, then your contract should include the following clauses*:

Force Majeure

(French for “superior force) is defined by Merriam-Webster as:

“an event or effect that cannot be reasonably anticipated or controlled”

Many people equate this term with ‘Act of God,’ but it’s not that simple. Your contract must be very specific about what it covers and what it doesn’t.

Escalation Clause

An escalation clause “is a provision in a contract that calls for adjustments in fees, wages, or other payments to account for fluctuations in the costs of raw materials or labor.

Construction business owners can mitigate or possibly eliminate the exposure that significant and unexpected material price increases have on their profits if they include an escalation clause in their contracts.

Mobilization Costs

From Construction Dive:

“In general, if material prices rise higher than what was included in the original bid, the contractor will be reimbursed for all or part of the difference.”

Mobilization costs are the cost it takes to start the actual production of the project. These costs are normally included in the overall price of the project, but given possibility of future shutdowns due to further outbreaks, limited building material availability, and other unforeseen factors, you may be required to stop work and re-mobilize at a future date.

Who is going to pay for multiple mobilizations? It depends on how these costs are defined in the contract.

In light of the pandemic, the language in your contract concerning mobilization, demobilization, and re-mobilization costs should be more extensive.

Termination Clause

The termination clause defines how the owner of a project can fire you, and, on the flip side, how you can fire the owner.

Termination clauses, whether from breach of contract or termination for convenience, should not be taken lightly. Termination clauses should be written to not only protect your construction business, but also written to protect the owner. You want to make sure all parties understand and agree on how the work will be performed and how to walk away, if needed.

Read this article from Levelset on 8 Contract Clauses That Could Sink You

*PLEASE NOTE: Nothing in this article should be deemed professional legal advice. You should speak with your attorney concerning all contracts, contract language, and contract clauses.

 

4 WAYS TO PROTECT YOUR PROFITS DURING MATERIAL SHORTAGES AND PRICE INCREASES

You’ve heard it before, but it’s too good not to say it again:

“If you fail to plan, then you plan to fail.”

Here are 4 ways to protect your profits amidst material shortages and price increases:

  1. Meet with your attorney.  Make sure you have the appropriate clauses and contract language to mitigate your risks and protect your margins.
  2. Make a video explaining your contract language. After you have met with your attorney and reviewed your updated contract language, shoot a screen capture video explaining your contract, in the simplest terms possible. Send this video to your next customer prior to execution of the contract. That way you will give your customers the chance to understand how your contract works and how it protects them and you. The added benefit is that you will save time when you execute the contract because you can focus on your customers’ specific questions.
  3. You may need to buy certain materials earlier than you normally would to ensure you have those materials when you need them. (I am not advocating hoarding. I am talking about proper planning.)
  4. Build up cash reserves. Cash solves most of your problems. Create a bank account and start putting 1% of every dollar of income into that account on a regular basis. Don’t worry. It’s just 1%. You won’t miss it. If you don’t touch it, then it will be there when you need it.**

**Yes, this is the foundation of the Profit First for Contractors cash management system.

Get my book here and sign up for the Profit First for Contractors additional resources here. I’ll send you a free video training series on the Four Core Principles of Profit First for Contractors.

 

MITIGATE YOUR RISK, PROTECT YOUR PROFITS, AND SERVE YOUR CUSTOMERS WITH YOUR CONTRACTS

Material prices are going up, and building materials are becoming scarce. Schedules are all out of whack, and it looks like the pandemic isn’t going away anytime soon.

I’m not trying to be all “Debbie-Downer,” but contractors who take a protective approach to the things you can control will fare better than the contractors who are reactive.

Design better contracts to protect your business, your customers, and your profits. Improve your communication systems with your customers, suppliers, and subcontractors using virtual and digital platforms, and start saving for a rainy day.

The good news is all of the things listed in this article will accelerate your business when storms aren’t brewing.

 

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