Material price increases: finding your exposure and protecting the budget
The rebar supplier's email arrives in May: orders shipping after 1 June will be priced from a new list. Your concrete price for a wastewater treatment plant expansion was fixed in January, on January's steel price, and none of its 150 tonnes of reinforcing steel has shipped.
Your exposure is in the few materials that are a large share of the cost, move in price and will be bought long after you priced them. Find them, check whether your contract lets the price move, and lock in the ones that could hurt. On a fixed price with no escalation clause, any increase comes out of your margin. Contracts that do adjust say how: a US federal rule, for example, describes adjustments based on established prices, on costs the contractor actually incurs or on indexes named in the contract, upward and downward.
- Rank the materials by cost and by months until purchase. Start with the packages whose quotes will expire before you can place a firm order.
- Read each quote's terms: how long the price holds, for what quantity, and what it includes.
- Read the contract's price terms: a fixed price, an adjustment clause (which index, base month, trigger, direction) or a cash allowance.
- Watch a public index for direction, not your supplier's price. Keep the actual quote beside it and check the quantity, delivery and expiry assumptions before adjusting your forecast.
- Lock in what pays: a written price hold negotiated at award, or an early purchase weighed against storage, damage and the cash tied up.
- Carry the rest at today's prices in the forecast or contingency.
- Never give the owner a firmer price than your suppliers give you.
Common mistakes
- Treating the estimate's price as fixed after the quote has expired.
- Buying everything early without counting storage, damage and the cash tied up.
- Reading a broad public index as your supplier's price.
- Letting a price hold lapse because the shop drawings slipped past its release date.
Checklist
Your price exposure check
- The five biggest materials and their purchase months
- Each quote's expiry and what it includes
- The contract's adjustment terms
- A written hold or firm order for the largest exposure
- Unprotected quantities at today's price
- Supplier terms matching your promise to the owner
Check your understanding
A supplier will hold your copper wire price if you take the whole order now, but you will install it over eight months. What do you weigh?
