By Erik Cofield, CGA
It's not news to you that unexpected events can have an effect on the completion date and profitability of a project, but your clients may lose sight of the fact that we all face change on an hourly basis. That's why your contract should address the issue of change on several levels, including project schedule, weather, material availability and pricing, and a comprehensive array of possibilities and expectations.
After all, if you communicate the unexpected in advance, it becomes the expected, and the expected is easier to handle than surprises. An escalation clause also permits you to adjust pricing if necessary to protect your margin when material costs are particularly volatile, as we've all seen following Hurricane Katrina.
This summer's media coverage of hurricanes should make every company in this industry realize not only the need to plan for change but also to communicate the issue–and protect your company operations. One method of protection is to use an escalation clause in your contracts. HGTVPro.com and NAHB have extensive information for you on such clauses; check out Builders Confront Price Spikes in Devastated Areas for a sample.
The Post-Katrina Clause
Below is another sample I co-wrote for our own company. Feel free to copy and paste it for use in your own contracts, inserting your own company name and prices, or rewrite it for your particular needs.
Escalation Clause:
This contract has been based on estimates that include costs of materials at current market rates. Due to the recent catastrophic hurricane in Louisiana and Mississippi, [your company name>] is concerned that prices of basic construction materials may rise to levels that would make it impossible to complete this contract without serious financial hardship or loss to [your company name], which would consequently have an adverse effect on our ability to complete and/or warrant the work included.
Additionally, realizing every client has a right to expect certain cost levels, a benchmark price for base construction materials is included below as part of this contract. Should those prices rise, the increase, applied to all similar materials, will be billed to the owner without change order fees, but with a [insert your own overhead markup profit or margin], and owner agrees to pay for these cost increases as billed.
Insert your own benchmark prices for items such as follows:
Roof shingles $xx per square
Concrete $xx per yard
1/2" CDX plywood $xx per sheet
2x4 framing $xx /Mbf
2x12 framing $xx /Mbf
Keep in mind, too, that there are other factors that affect pricing, such as trade tariffs with Canada. Your company is not immune, by location or other variables, to price changes, potential price gouging, or any other type of change. It's better to protect yourself with an escalation clause before starting a project than to risk a loss or a lawsuit afterward.
Erik Cofield, CGA, is chief operations officer of Houston Structural, Inc., Houston, an award-winning residential design/build remodeling company with an annual volume of just over $4 million. Erik is also a speaker, freelance writer and business management consultant to the housing industry.
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