Dispatch #69 - Protect Your Jobs Against Cost Increases & Delays of Materials

A good portion of the contractors I work with are reporting sharp and sudden increases in the cost of materials and equipment, as well as concerns about availability (at all) and delivery dates (delays). How to protect your jobs against these supply-side risks?

Start by understanding your exposure in existing customer contracts. Can you pass through price increases and if so, at what markup? Does the person doing the buyout for the job know that? What is the specific protocol to activate this kind of change order? Don’t forfeit your rights due to a notification technicality. Another issue: will you be penalized (liquidated damages) for schedule delays caused by your supplier’s inability to deliver on time?

Going forward, include in your customer contracts reasonable protection against these risks, and in proposals, set a time limit for how long you’ll hold prices firm (e.g., “This bid is valid for 14 days.”)

On the supply side, ask a materials or equipment supplier to hold their cost quote firm for the same duration you’re offering to your customer. For frequently used commodities, consider a longer-term purchase contract as a hedge against rising prices (of course if prices or demand drop you’ll lose money on that bet).

Similarly, you can carry more inventory of at-risk materials and equipment. This strategy sacrifices cash flow for margin and schedule protection, which in today’s market I see as particularly important. Not being able to finish a job because you’re waiting on a piece of equipment amplifies a project’s risk (a lot can happen in a few weeks or months of delays).

I wouldn’t count on penalizing your suppliers for delivery delays to recoup some of your losses: this is expensive to enforce, your supplier might not be able to pay, and at the end of the day if they can’t deliver you still haven’t solved your problem with the customer.

Whatever strategies you decide on, educate and empower your internal team — estimator, project manager, purchasing, accounting — for proper execution.

Finally, strong customer, supplier, and subcontractor relationships — reasonable people making reasonable accommodations to get things built — are more important than ever. The goodwill you’ve built up over the years could make all the difference if you’re caught in a tight situation.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.