Heck, with oil at $ 111.00 per barrel and materials jumping all over the place, like for instance, April 1st an increase of between 10% to 15% across the board on all roofing materials. On May 1st, the exact same increase is projected from letters we received from manufacturers and suppliers.
I just delivered 2 proposals and had the prics calculated with the lower end of the increase, so I would not get burned, but I am certain that few other contractors I compete with will do the same, so now my prices are even farther away from the run of the mill crowd of low-mid ballers.
I could probably pull in more clients, if I just add an "Escalation Clause" to the contract, instead of guessing and trying to be as completely up front with the customer as possible.
Now, what would be the proper and ethical and most legal way to do that. It can not just be made up on a whim, with no relevant back up to show the original date and quoted price of a certain material, so I looked at some informative articles on the subject.
Ed
Here is one from Michael Stone, of MarkUpAnProfit.com, monthly newsletter.
Contract Escalation Clauses
Contract escalation clauses have been around a long, long time. They have been primarily used on large commercial projects where the job duration will exceed one year. However, with the increased size of residential new construction and remodeling and recent economic changes due to oil prices and Katrina, it is time to look at including a Contract Escalation Clause in your contracts. If done properly, they will protect you from the inevitable bump in prices. If done improperly, you are headed for a big fight with your customer and possible legal problems as well.
Please remember this is not legal advice. We are not attorneys. Use any and all of the materials in this newsletter at your own risk. We strongly recommend that you consult your attorney for help in reviewing and/or writing any contract language and especially a Contract Escalation Clause.
Depending on the work you do or service you provide, the primary function of the Contract Escalation Clauses is to protect you against lumber and sheet material price increases. However, in today's market, you also need to protect yourself against increases on any product made from petroleum (roofing and gas/diesel, floor coverings, etc) and anything else that could increase the overall price of your job more than 2% to 3% at any given time.
Here are some things you should consider when compiling your Contract Escalation Clauses:
How do you define the original prices that have escalated? The definition must be specific.
On large commercial work the Contract Escalation Clauses is normally set by price indexing the materials involved.
Specify materials and or labor likely to increase. Again, you should be very specific on what the Contract Escalation Clauses includes. The term "building materials" won't fly. Dimension lumber, all plywood, OSB, particle board, TJI, manufactured trusses, fasteners, etc, give you a specific definition.
Set the limit of escalation at 2% to 3% of original price on specific materials. In other words, you will honor the original quote on the job unless the price of the materials will increase your cost more than 2% or 3%. If the price of dimension lumber increases your cost by 5%, the owner agrees to pay you not only the additional 5%, but you should also include a percent to cover the additional bookkeeping and the time spent on the phone and processing the increased expenses.
If you aren't getting a significant down payment on jobs, one option is to have the owner agree (by contract) to pay you for materials on the day they are delivered. That way you can pay the supplier that day or the next, guaranteeing the price of the materials. Be sure and specify that if the owner delays payment in any way, they are responsible for any price increases that apply to those materials until they are paid. You could apply this same wording to cover the materials that your subcontractors bring to the job site.
The downside to this is that you must keep accurate notes. Everything I have read says loud and clear, you must be able to document any price increases above the original contract amount. If you can't document, you won't collect the difference. Also be sure to specify how Change Work Orders are impacted.
Dan Cline, owner of Diversified Refrigeration Company, in Valley Springs, CA, a commercial contractor, sent the following note, outlining what is probably the simplest approach:
"The way we deal with this is quotes are only good for 30 days and if it is a major material order we make the supplier hold their pricing for the same period (or longer). If the customer wants to accept the bid after this date, than we check the pricing and advise. If the job is accepted during the 30 days we place the order and bill the customer, advising them of their option to order early and save the increase in cost."
Sonny Lykos sent the following note about Contract Escalation Clauses:
"An 'escalation' clause such as you ask can be done, but only if the contractor specifies the current cost of pertinent materials he included in his proposal. For example, the cost of CDX plywood. Furthermore, those amounts cannot just be inserted, but should be in the form of a 'quote' from a lumberyard at the time of the contract, and inserted as an 'Addendum' to the contract. By having the quote, the contractor cannot later be accused of showing unrealistic 'current' costs as a tactic to get more money."
I sent a note to Tom Reavey in Los Angeles, CA asking for his opinion on Contract Escalation Clauses. Tom fired back the following question and comment:
"Would any of this fall under 'The Act of God' clause? Things outside of our control that impact a job. Usually you try and absorb small increases, etc. You don't want to send the signal that you are trying to gouge someone unduly, but if it is a legitimate condition that is obviously no fault of the Contractor or the Owner, it is the Owners responsibility to suffer the blow since it is his property that is being improved and requires the materials that are costing a premium. It's not the Contractor's property and the Contractor is not being enriched by the work. He is just asking for what is reasonable to cover the increase cost of materials, etc. I do have a clause in my contract that speaks to acts of God, union issues; material increases after contract signing, etc. I have never used it to collect for increased material costs but I would if it meant taking a big enough hit. I would discuss it as soon as possible, laying out the rationale, cost differential, and method we plan to use for passing these cost increases onto the Owner. It would be important to let the Owner see you are not doing this to enrich yourself but just to get the increase material cost covered, as it should be, by the Owner."
Here is some language that we drafted up to give you a start. If you can improve on this, please send it along and we will revise and repost this for everyone.
Material Price Increase:
Owner understands and agrees that a material allowance amount has been estimated and included to cover the entire expense of the {SPECIFY MATERIAL(s)} for this job. This amount is included to set the price on those materials in anticipation of potential material price increases beyond {CONTRACTOR}'s control. The MATERIAL ALLOWANCE AMOUNT IS: ${SPECIFY AMOUNT}.
{CONTRACTOR} will notify owner immediately during the job if material price increases cause the cost of {SPECIFY MATERIAL(s)} for this job to exceed the MATERIAL ALLOWANCE AMOUNT. The Owner may then, at his option, terminate this contract by providing within (#) business days both written notice of termination to the Builder and payment to the Builder for all costs expended in performance of the contract up to the date of termination, plus payment of ${SPECIFY AMOUNT} based on the percent of completion. If Owner fails to terminate this agreement upon notice of the material price increases within (#) business days, {CONTRACTOR} may proceed to purchase the {SPECIFY MATERIAL(s)} at the increased price, and the Owner shall be required to pay the increased cost as provided herein.
Final review of all specified material invoices will be reviewed by Owner and {CONTRACTOR} within 24 hours of job completion and the final price for the {SPECIFY MATERIAL(s)} will be calculated, along with (%) for administrative fees, and will paid to {CONTRACTOR} by Owner in addition to the final payment for the job.
Additional Contract Escalation Clauses can be found on the NAHB Web site. You can find much more information on the web and we encourage you to do so.
Again, we want to remind you that this is not legal advice. We are not attorneys. Use any and all of the materials in this newsletter at your own risk. We also strongly recommend that you consult your attorney for help in reviewing and/or writing any contract language and especially a Contract Escalation Clause like we have included here.
Finally, please don't read this and set it aside with a plan to "get back to it later." Price increases are coming at you as a result of the big storms around the gulf states, and those that procrastinate are going to pay dearly. The time to review and revise your contracts is now.
Top
I just delivered 2 proposals and had the prics calculated with the lower end of the increase, so I would not get burned, but I am certain that few other contractors I compete with will do the same, so now my prices are even farther away from the run of the mill crowd of low-mid ballers.
I could probably pull in more clients, if I just add an "Escalation Clause" to the contract, instead of guessing and trying to be as completely up front with the customer as possible.
Now, what would be the proper and ethical and most legal way to do that. It can not just be made up on a whim, with no relevant back up to show the original date and quoted price of a certain material, so I looked at some informative articles on the subject.
Ed
Here is one from Michael Stone, of MarkUpAnProfit.com, monthly newsletter.
Contract Escalation Clauses
Contract escalation clauses have been around a long, long time. They have been primarily used on large commercial projects where the job duration will exceed one year. However, with the increased size of residential new construction and remodeling and recent economic changes due to oil prices and Katrina, it is time to look at including a Contract Escalation Clause in your contracts. If done properly, they will protect you from the inevitable bump in prices. If done improperly, you are headed for a big fight with your customer and possible legal problems as well.
Please remember this is not legal advice. We are not attorneys. Use any and all of the materials in this newsletter at your own risk. We strongly recommend that you consult your attorney for help in reviewing and/or writing any contract language and especially a Contract Escalation Clause.
Depending on the work you do or service you provide, the primary function of the Contract Escalation Clauses is to protect you against lumber and sheet material price increases. However, in today's market, you also need to protect yourself against increases on any product made from petroleum (roofing and gas/diesel, floor coverings, etc) and anything else that could increase the overall price of your job more than 2% to 3% at any given time.
Here are some things you should consider when compiling your Contract Escalation Clauses:
How do you define the original prices that have escalated? The definition must be specific.
On large commercial work the Contract Escalation Clauses is normally set by price indexing the materials involved.
Specify materials and or labor likely to increase. Again, you should be very specific on what the Contract Escalation Clauses includes. The term "building materials" won't fly. Dimension lumber, all plywood, OSB, particle board, TJI, manufactured trusses, fasteners, etc, give you a specific definition.
Set the limit of escalation at 2% to 3% of original price on specific materials. In other words, you will honor the original quote on the job unless the price of the materials will increase your cost more than 2% or 3%. If the price of dimension lumber increases your cost by 5%, the owner agrees to pay you not only the additional 5%, but you should also include a percent to cover the additional bookkeeping and the time spent on the phone and processing the increased expenses.
If you aren't getting a significant down payment on jobs, one option is to have the owner agree (by contract) to pay you for materials on the day they are delivered. That way you can pay the supplier that day or the next, guaranteeing the price of the materials. Be sure and specify that if the owner delays payment in any way, they are responsible for any price increases that apply to those materials until they are paid. You could apply this same wording to cover the materials that your subcontractors bring to the job site.
The downside to this is that you must keep accurate notes. Everything I have read says loud and clear, you must be able to document any price increases above the original contract amount. If you can't document, you won't collect the difference. Also be sure to specify how Change Work Orders are impacted.
Dan Cline, owner of Diversified Refrigeration Company, in Valley Springs, CA, a commercial contractor, sent the following note, outlining what is probably the simplest approach:
"The way we deal with this is quotes are only good for 30 days and if it is a major material order we make the supplier hold their pricing for the same period (or longer). If the customer wants to accept the bid after this date, than we check the pricing and advise. If the job is accepted during the 30 days we place the order and bill the customer, advising them of their option to order early and save the increase in cost."
Sonny Lykos sent the following note about Contract Escalation Clauses:
"An 'escalation' clause such as you ask can be done, but only if the contractor specifies the current cost of pertinent materials he included in his proposal. For example, the cost of CDX plywood. Furthermore, those amounts cannot just be inserted, but should be in the form of a 'quote' from a lumberyard at the time of the contract, and inserted as an 'Addendum' to the contract. By having the quote, the contractor cannot later be accused of showing unrealistic 'current' costs as a tactic to get more money."
I sent a note to Tom Reavey in Los Angeles, CA asking for his opinion on Contract Escalation Clauses. Tom fired back the following question and comment:
"Would any of this fall under 'The Act of God' clause? Things outside of our control that impact a job. Usually you try and absorb small increases, etc. You don't want to send the signal that you are trying to gouge someone unduly, but if it is a legitimate condition that is obviously no fault of the Contractor or the Owner, it is the Owners responsibility to suffer the blow since it is his property that is being improved and requires the materials that are costing a premium. It's not the Contractor's property and the Contractor is not being enriched by the work. He is just asking for what is reasonable to cover the increase cost of materials, etc. I do have a clause in my contract that speaks to acts of God, union issues; material increases after contract signing, etc. I have never used it to collect for increased material costs but I would if it meant taking a big enough hit. I would discuss it as soon as possible, laying out the rationale, cost differential, and method we plan to use for passing these cost increases onto the Owner. It would be important to let the Owner see you are not doing this to enrich yourself but just to get the increase material cost covered, as it should be, by the Owner."
Here is some language that we drafted up to give you a start. If you can improve on this, please send it along and we will revise and repost this for everyone.
Material Price Increase:
Owner understands and agrees that a material allowance amount has been estimated and included to cover the entire expense of the {SPECIFY MATERIAL(s)} for this job. This amount is included to set the price on those materials in anticipation of potential material price increases beyond {CONTRACTOR}'s control. The MATERIAL ALLOWANCE AMOUNT IS: ${SPECIFY AMOUNT}.
{CONTRACTOR} will notify owner immediately during the job if material price increases cause the cost of {SPECIFY MATERIAL(s)} for this job to exceed the MATERIAL ALLOWANCE AMOUNT. The Owner may then, at his option, terminate this contract by providing within (#) business days both written notice of termination to the Builder and payment to the Builder for all costs expended in performance of the contract up to the date of termination, plus payment of ${SPECIFY AMOUNT} based on the percent of completion. If Owner fails to terminate this agreement upon notice of the material price increases within (#) business days, {CONTRACTOR} may proceed to purchase the {SPECIFY MATERIAL(s)} at the increased price, and the Owner shall be required to pay the increased cost as provided herein.
Final review of all specified material invoices will be reviewed by Owner and {CONTRACTOR} within 24 hours of job completion and the final price for the {SPECIFY MATERIAL(s)} will be calculated, along with (%) for administrative fees, and will paid to {CONTRACTOR} by Owner in addition to the final payment for the job.
Additional Contract Escalation Clauses can be found on the NAHB Web site. You can find much more information on the web and we encourage you to do so.
Again, we want to remind you that this is not legal advice. We are not attorneys. Use any and all of the materials in this newsletter at your own risk. We also strongly recommend that you consult your attorney for help in reviewing and/or writing any contract language and especially a Contract Escalation Clause like we have included here.
Finally, please don't read this and set it aside with a plan to "get back to it later." Price increases are coming at you as a result of the big storms around the gulf states, and those that procrastinate are going to pay dearly. The time to review and revise your contracts is now.
Top