As a contractor, you know that prices for materials fluctuate regularly. Most of the time, you can anticipate what’s likely to happen and plan ahead. At other times, you get hit with a surprise new tariff that dramatically increases costs. When you’re bidding on projects that won’t be completed for a year or two (or longer), it’s hard to predict now what you’ll pay for the things you need. Here are a few ways you can manage it without losing your profit margins.
Keep an Eye on Rising Prices
Prices don’t always go up with inflation. Sometimes they go down. On occasion, they’ll fluctuate, especially if there is some event like a disaster that forces everyone in the supply chain to accommodate. Sometimes, price increases mean that certain businesses will struggle to keep up. If you want to avoid being one of them, you should keep tabs on the news and regional prices for all materials you use regularly. Update your estimates as prices change so you don’t accidentally use last year’s numbers.
Round Up, Not Down
A good rule of thumb for many construction materials is to estimate how much you’ll need and add an extra 10 percent. You might want to do something similar for material prices, as well. You can’t predict when the federal government will institute a tariff that increases the cost of materials you bring overseas by a margin as large as 25 percent. But you can guess that prices will go up year after year. Look at price averages in your region and how they’ve changed over the past five years. Use that data to inform your estimates, and always round up. Underbidding on materials may make your bid more appealing to clients looking for a bargain. But you’ll pay for it with less money to keep your business going.
Consider an Escalation Clause
Once you sign a contract, generally you’re committed to doing the work at the price you specified. An escalation clause gives you a way to renegotiate the contract based on price increases. The terms are usually very specific, which means that you’ll have limits on the time you can raise prices, how much you can increase them, and how soon you can get payment for the difference. If you can’t reasonably predict what materials will cost you for the project, the clause may make the difference between safeguarding your profits and shaving them off entirely.
Evaluate the Best Terms
In an industry with fluctuating material prices, using escalation clauses can be a way for contractors to avoid cutting into their profits when prices go up. It’s important to choose the right one based on the project. For example, you might opt to share the risk up to a certain point. If the project is relatively short and you don’t anticipate rapid changes, you can offer to shoulder the increase unless it passes a certain percentage.
During longer projects, it may make more sense to activate an escalation clause past a certain amount of time. That helps to accommodate price changes that happen months or years later. Some escalation clauses allow you to raise the price the day it changes. If you want or need this level of flexibility, expect to show your work in your original price estimate.
Keeping a contracting business above water involves careful attention to the prices of materials you use. By tracking material costs and adding escalation clauses to certain contracts, you can protect your income and profits. To discover more benefits of running your own business, contact CSLS today!