We do predominantly cost-plus contracts, so we needn't be as concerned about escalating costs. However, in addition to our contract, we do include language stating that in times of volatile fuel price increases, the customer should be prepared to pay fuel surcharges for materials deliveries, carting, and other services that are sensitive to fuel fluctuations.
Our labor rates are also fixed at the time of contract signing, but to protect ourselves from profit erosion, we state that labor rates (individual) can increase if the project extends beyond six months. This allows us the opportunity to increase the labor charge on a particular employee deserving of a raise without the company incurring the complete cost.
Menno S. Martin Contractor
St. Jacobs, Ontario, Canada
We have a good relationship with our building materials supplier. When lumber prices are about to increase, they ask us what projects we have coming up. If we give them a rough materials list, they will hold that material for us at the current price.
Most of our projects are started within two to three months. If we have work that is to start six months or a year from now, we tell our client that the price will need to be re-visited just before the project begins. We will often offer a proposal “good for 30 days” when prices are more volatile.
We maintain and adjust price lists regularly by identifying at least our top 20 services. If we can control those top 20 areas, and a price crisis happens, we should be fairly well protected with the majority of bids. We try to purchase some inventory when prices are stable or low.
If we have any large projects in the works, we secure material and subcontractor bids earlier than usual. We have our field employees keep an eye on pricing. Employees feel they are contributing by watching the material pricing and letting the estimator know when changes happen.
We shorten acceptance periods on proposals, two weeks instead of 30 days. We shop our suppliers more often; a little more time spent checking prices sometimes saves us big money!
Custom Design & Construction
There are a couple of effective cost control measures that we implement. The first is based on our business model. We are a design/build firm that subcontracts all of our labor. This allows us to enter into fixed-price subcontracts before we set our price to the homeowner. This transfers the risk of increased labor costs to the subcontractor.
Recently, we have also added a material cost-inflation clause to our contract. This is particularly important for projects that we anticipate will have a lengthy permitting process. We price out the material list at the time the contract is signed and re-price at the start of construction. Increased material costs are then passed on to the homeowner.
The answer to this question for me is twofold: material volatility and labor/subcontractor volatility. When the price of lumber, drywall, concrete, or any other building product is fluctuating, I reduce the amount of time the contract is good for to limit my exposure and also include a material-escalation clause to protect me against major price changes and shortages caused by factors beyond my control — such as a hurricane or the like.
With regard to labor, we do about 50% to 70% of the labor in-house, so this is totally under my control. When subs are involved, we go back and make sure that the subs hold their pricing for as long as my contract price is good.
This process has worked well for me, but it is by no means perfect. No matter what you have on paper, it is always up for interpretation, and when you get a customer from hell, it's up for grabs.