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Navigating Inflation – How Contractors can Protect Themselves from Rising Material Costs

Since the start of the COVID-19 pandemic, many contractors have been fighting to stay in business with the odds working against them. Specifically, over the last 12 months, we have seen the rise in material costs, supply chain issues, and labor shortages cost contractors in more ways than one. As a national surety agency, we have seen our clients try to adjust to the ever-changing construction landscape while doing their best to stay afloat and keep their employees paid. Contracts signed prior to the pandemic that were put on hold for months on end are now well underway. The only caveat is that most contracts failed to include proper verbiage to protect contractors from rising material costs, back-ordered deliveries, labor shortages, etc. – all things that not only slow down progress significantly but also reduce the contractor’s revenue on the job.

Many contractors are finding that certain suppliers are reducing the amount of time their quotes are valid for materials because the cost of materials is changing so quickly. Contractors have recently found that suppliers are keeping quotes active from 1-7 days rather than the usual 30-day standard.

Because we are still learning as we go in regards to the impact of COVID-19 on various industries, we want to make sure to offer our clients the best advice to help them be proactive in the future rather than reactive. Listed below are tips to help mitigate inflation risks that are often associated with materials needed for construction projects as well as insight into how the cost of bonds may change as costs continue to rise.

Contract Negotiations that Protect the Contractor

It is important for contractors to include specific language that protects them from rising material costs. Between inflation and supply shortages, material costs are fluctuating quickly. Specific language in your contract should include compensation for increased costs for certain materials and supplies.

Another thing that should be considered in your contract is time delays for specific supplies and materials. Contractors are often responsible for delayed project timelines, even when it is completely out of their control, often costing them quite a bit of money. Your contract should include language that protects you from out-of-pocket expenses that are caused by delayed deliveries. Some project owners will add penalty fees to delayed projects, your contract should include language to protect you from delayed schedules due to delivery issues or change orders that are out of your control.

Have an Attorney Look Over Your Contract

The right language matters when it comes to protecting your business. It is important to have an attorney who is familiar with your industry review your contract prior to signing. You want your contract to be clear and concise when it comes to the specific language that protects you from rising material costs and delayed deadlines do to supply chain issues.

Bid Adjustments

If you are unable to add specific language to your contract to protect your company from revenue loss, you can adjust your bid to include a potential increase in material costs. Not all project owners will accept bids like this but during these hard times, it is important to protect yourself and your company’s earnings as much as possible.

Include Potential Savings in your Contract

Business owners are always looking to save money. In your contract, include specific language that offers the owner savings if the projected materials cost is lower than expected. While some contractors would take the full material budget and include it in their revenue from the job, you could potentially win the bid against your competitors if you include potential savings for the owner into your bid and contract.

Offer Solutions

With the current material volatility, it is important to find solutions that will help both you and the owner of the project. As an industry expert, the project owner will look to you for solutions to increased material prices, delivery delays, and labor shortages that are causing the project timeline to slow. If you know of similar materials that are readily available and an equal comparison to the material you need but is not currently available, offer these solutions to the owner.

Consider Buying Materials Early and Delay Delivery

One way to combat material inflation is to lock in a good price and purchase the material before the project is set to begin and delay the delivery until you are ready. This has to be agreed to in the contract but it is a great alternative to ensure you don’t lose money because the cost of materials has increased significantly since your initial bid. This will also help with suppliers who are offering shorter quote lengths. Once you win a bid, purchase the material needed quickly and schedule delivery based on your projected timeline. This could also help with current delivery delays. Purchasing the materials earlier gives you more time for the actual delivery to be made.

Talk to your Surety Agency Prior to Bidding

With the rise in material costs, your surety bond amounts may be higher than you originally anticipated. Talk to your surety agent to learn what the current bond market looks like and if your rates will increase. Your agent will be sure to get you the best rate possible while making sure you are protected along the way. It is important to avoid claims no matter the current economic climate, but now more than ever we encourage our customers to avoid claims at all costs. Make sure you are protected with the contracts you sign and work with a surety agency that provides bond solutions that make sense for your business.

Contact Surety Place Today for your Construction Bonds

We establish a relationship with you in order to truly understand your business focus whether large or small, complicated or difficult.  As one of the only true specialists within the industry, we supply access, partnerships and specialty programs with numerous “A” rated sureties across the nation. We are here to help you service all your bonding needs with no appointments or contracts necessary.

Because of our industry knowledge and expertise coupled with our ever-increasing specialty programs, we have the unique ability to write your bonds when no one else can, and because of our relationship with you, we will stand behind you in support to achieve your agency or business objectives.

July 14th, 2022
Surety Place