DEAR BUILDERS, DREXEL HOPES THIS IS A TOOL YOU MIGHT USE TO PROTECT YOUR BUSINESS!
THIS IS A LETTER TO BUILDERS IF THEY HAVE BEEN CONSIDERING AN ESCALATION CLAUSE.
Hurricanes, owls, beatles (the bug not the band), tariffs, snow, fire, labor, tariffs, and plethora of more can cause lumber prices to escalate. And in the day and age of “just in time” and “instant information” culture, the peaks and valleys are soaring more than ever.
This graph should pretty much freak you out. I hope it does. Hit the low at bid and the high at ship…and you might find yourself out of a business as the supplier or builder. It’s that serious. How do you protect yourself without losing all credibility with your homeowners and “ripping up contracts?”
It’s time to protect the homeowner, builder, and supply chain with commodity escalation clauses.
We are not a lawyer or take any liability in these contractual situations, but we do hope to provide guidance to you, and your homeowners to protect all parties.
“Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control.” — Jeff Turner, Sept, 2020, NCHBA.ORG
We have provided an ESCALATION CLAUSE FOR SPECIFIC BUILDING MATERIALS as provided to us by the North Carolina Home Builders Association. It is a one-page document that is transparent to the homeowner and client. It may not be perfect for you, but it’s a good starting point.
The start of a contract to build due to extended business workflow might be 6 months! That is far too big a risk for any vendor, builder or homeowner in fluctuating markets! It would only make sense to price at time of shipment, but how can you do that in a contractual way?
There are common methods to use an escalation clause. Let’s explore an article.
“There are several methods commonly used when setting the escalation. The simplest is the “invoice” method, in which you use a supplier invoice or similar document to substantiate a materials price change.
A second option is the index method, under which you use a widely accepted, published price index to support your claim. Such indices are typically available for materials such as lumber, cement and steel. However, the DOL warns that any given index might not be available for a particular time period, because either price information wasn’t supplied by enough survey respondents to meet publication standards, or the index was discontinued due to a decline in the commodity’s importance in the marketplace. It’s also possible that any particular index won’t accurately account for localized cost variations.
A third option is a hybrid approach. Under one such approach, the triggering event is specified as an increase under both the invoice and index methods. Under another hybrid approach, the invoice method is subject to a limit based on a widely accepted index.
In any case, the rationale behind these hybrid approaches is to provide a check and balance on invoices by ensuring that the supplier’s prices aren’t widely different from market prices. Work with your CPA to determine an accurate method of calculating any materials price escalations.” – https://www.smith-howard.com/could-including-an-escalation-clause-in-your-contract-help-with-your-materials-costs/
Another way to call it is “trigger points.” Based on certain criteria we must charge x more because of x.
Simple and easy to understand. I think that is one of the keys in any good contract.
Check with your CPA and attorney what option would be best for you.
How do you explain that it indeed benefits the HOMEOWNER? Won’t they see this as a smoke and mirror tactic?
I believe honesty is the best policy. We all WANT to build this home! However, if we don’t have this clause, you might be OVER PAYING for materials as our supplier and myself as the builder have to take this risk factor into play. By putting it as an escalator clause, we are being honest with you. We hope we don’t ever have to use it, but we may and we want to be clear on that, and if you are not comfortable with that, we understand if you no longer want to build. However, with the cost of money over time, I don’t ever feel that is a good idea for most. Also, we can make changes to the home in other areas to offset the cost. And for most it is a quality of living issue, and let’s not delay that!
It’s not a cure-all. Communication is the key between you and your supplier and homeowner. The more you know the better it will be for all!
At Drexel Building Supply and our manufacturing facilities Drexel Systems, we try to keep our people informed to help you. And we try to buy it right to always offer you the best price you can find. We work directly with mills and will buy long, buy short, buy right. Our team has decades of experience and strong ties with North America’s best mills. You are in good hands. Yet we can not control the ups and the downs of the market. If you ever want to talk about pricing or anything else, call me Joel Fleischman @ 920-979-4045 or via email firstname.lastname@example.org