Nothing is ever certain. There is no way to predict what the future holds or when unexpected events may occur in our ever-changing construction world. Before the pandemic, we were comfortable with the idea that the cost of materials required to complete our projects would stay relativity static, or at least we would have ample notice of any price increases. With that being said, we never expected that material costs on projects we were already committed to completing for a fixed price would increase so much that not only would we not make money, but we would lose our asses.
Welcome to the COVID era, the “New Normal,” the rabbit hole we fell into where there seems to be no way out. So, what do we do as business owners in the construction industry? We must adjust, prepare, and work hard to figure it out. In this situation, we adjust our processes to be prepared for the unknown. Or, more specifically, we adjust the language in our bids and contracts to be as flexible as we have to be in this new era. The ideas below will be effective if you are a residential or a commercial contractor.
Your bid is your estimate of what you think it will cost to complete the work with the relevant information that you have at that time. When you issue a bid to protect your company from unexpected price increases, you should add that your bid will expire after a certain date. If material prices increase more than a certain amount, the increased expense is added to your bid amount.
Below is some language you can add to your bid to protect your company from unexpected price increases:
“If the cost of materials required to complete this project increase more than 3%, the additional material cost will be added to the cost given to complete the project. This bid will expire if not accepted in 30 days.”
For residential customers and commercial projects working directly for the owner, I would also explain what this means when you give them the bid. Suppose you are a subcontractor submitting a bid to a general contractor. In that case, it is not uncommon that the general contractor will want you to sign an agreement that locks you into the price given in your bid regardless of the terms in your bid.
For example, I have a client that bid on a commercial project in 2019, but the subcontract was not sent to him until the end of 2020. By then, the prices had increased; therefore, he could no longer complete the work for the same price, so he never signed the contract. In early 2021, he received a letter from an attorney demanding that he pay the general contractor $115,000 for their increased cost for his scope of work. My client had originally signed an agreement when the bid was issued stating that he would honor the price given in his bid and the general contractor could rely on that price. Despite my client not signing the contract, the general contractor still had to complete the job and ended up hiring a different company to do his work. The price of their work was $115,000 more than what my client had originally promised in his bid. I am not sure how this case will end, but it is an uphill battle.
It is crucial to understand how difficult it is to get out of the terms of an agreement you sign on behalf of your business. The best way for a commercial contractor to protect themselves and prevent a situation like this is to include language in their bid explaining how the bid is only good for a short period of time and if the price increases before the bid is accepted, that they can get the increased price. The next step for the contractor is to carefully review anything the general contractor has them sign when they submit their bid so that they are not negating those terms that were just put in their bid.
Once you make it past the bid process, the next step is to protect yourself when signing the contract. A GMP contract means that you will do the work for a Guaranteed Maximum Price. But any contract you sign that does not have a provision that allows you to recover the increase of material cost basically becomes a GMP contract. The GMP contract is at least upfront about the fact that you will eat any increase in material cost. But any contract that does not specifically say that you are entitled to recover the increased cost of materials means that you are not entitled to get paid anything over what you agreed to do the work for, even if the cost of material skyrockets.
It is imperative that you make sure you add something to any contract you sign that you will be allowed to recover the increased cost of materials.
Below is an example of language you could use to ensure you can recover an increase in material costs:
“If at any time during the progress of the work under this contract the materials required to complete the work increase more than 3%, contractor is entitled to be paid the increased cost of materials.”
Suppose you don’t take the step to make sure language like this is added to your contract. In that case, you will be at the mercy of the owner or general contractor to agree to a change order for the increased cost of materials where they are not legally obligated. Being aware of dangers on the front-end is crucial to the success of your business. The construction industry is fluid and ever-changing. You must be two steps ahead and cover all your bases to ensure your company’s protection, and that starts with you!
About the Author:
Published author, award-winning lawyer, devoted wife and mother to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed - making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books - Quit Getting Screwed: Understanding and Negotiating the Subcontract and, in September, Quit Getting Stiffed: A Texas Contractor’s Guide to Liens & Collections.
In the seventeen years she has practiced construction, real estate, and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm’s accessibility efforts. Providing education to contractors on a national level has become Karalynn’s personal mission, and she is always doing what she can to help make it a reality.