In today’s market, contractors often find themselves playing The Price is Right when bidding material costs — trying to hit the number just right without going over. But with new (and changing) tariffs targeting steel, aluminum, and other goods in 2025, that guessing game just became even riskier.
Should contractors base bids on current prices and absorb the risk of dramatic cost increases down the line? Or should they build in a buffer against future uncertainty and potentially price themselves out of the job? Another move may be to include a material escalation clause in your contracts.
In fixed-price or lump-sum contracts, general contractors, subcontractors, and suppliers typically bear the brunt of material price increases. However, supply chain disruptions and price volatility are increasing in the current economic climate, so builders have an incentive to address cost escalation more directly.
A material escalation clause allows parties to adjust the contract price if material costs rise significantly during the course of the project. It effectively shifts risk away from the contractor and toward the project owner. Material escalation clauses can be either “cost-based” or “index-based.” A cost-based clause compares the contractor’s actual incurred material cost to bid-day estimates, while an index-based clause ties pricing to published indexes such as the Producer Price Index (PPI) from the U.S. Bureau of Labor Statistics.
A typical material escalation clause would provide a contractor with entitlement to a change order if a significant change in the price of material occurred after the contract was executed. A significant price change would be defined contractually and tied to a threshold percentage increase in the cost of the material. Many clauses also include a cap on the amount of a price increase that an owner would be required to absorb.
Convincing an owner to include a material escalation clause can be a challenge, especially if they’re focused solely on keeping upfront costs low. Here are two strategies to make the conversation easier:
- Offer Bid Transparency – Explain that bidding based on current material costs, rather than padding your bid with risk premiums, is only possible if the contract allows for later adjustments. In short, escalation clauses can lower the base bid.
- Include a De-Escalation Component – Consider a two-way clause that benefits the owner if material prices drop beyond a certain threshold. This gives owners comfort that the clause isn’t just a one-sided windfall for the contractor.
Even though it may be a difficult conversation with an owner, spending the time to sort through material cost escalation clauses prior to contracting may be beneficial to both parties by providing more certainty around price risk during a period of expected volatility in global markets. If you have any questions about material escalation clauses or drafting contracts generally, please do not hesitate to reach out to Hunter Webb.