With the looming possibility of tariffs causing sudden and significant increases in the prices of building materials within the construction industry, contractors, subcontractors and others who contract to perform construction work can suffer significant losses. This is particularly true when the prices they must pay for materials rise significantly between the time they sign a contract to provide materials and actually purchase the materials necessary to meet contractual obligations. The general rule is that, unless there exists a contract clause allowing contractors or subcontractors to pass significant price increases for materials on to others, contractors and subcontractors are stuck with the price they stated in the contract or subcontract. When prices rise, the contractor or subcontractor must absorb the difference when they purchase materials at a much higher price than anticipated. Rising prices can convert a profitable venture into a catastrophic financial failure. How are contractors and subcontractors to protect themselves?
Once a contract is executed, there is usually little that can be done to change the contract to address rising prices. Effort must therefore turn to establishing protection before a contract is signed. The best technique for dealing with increasing future prices for building materials is by adding a price escalation clause to contracts and subcontracts. While this will not help for past contracts or subcontracts, it can certainly offer significant protection going forward.
Set forth below are three options for contractors and subcontractors to consider in dealing with future increases in the price of materials. Adding a clause like one of these to a construction contract or subcontract before it is signed allows a contractor or subcontractor to pass a significant materials price increase on to those with whom it contracts. While neither of the three options may be appropriate for any particular circumstance, a review of them may be helpful to contractors and subcontractors hoping to add protection on an issue which seems to present a significant looming concern. The main difference between the three options presented is the length and complexity of each.
Among the options below, please note that there is a blank space in each for the percentage by which the price for materials must increase before the contractor’s customer may be required to compensate the contractor for those price increases. In each case, the triggering percentage is subject to determination which will depend on the needs of the contractor. The specific percentage may somewhat depend on how much the materials component of the contract compares to the labor component. It is not uncommon for clauses like this to be as low as 5% and as high as 25%. The percentage will depend on the situation and negotiation skills of the contractor.
In using a contract term like those below, it is important to customize the language to the rest of the contract document. The terms used in the example are “Contractor” and “Customer”. It could just as well be “Subcontractor” and “Contractor” or “Contractor” and “Owner”. The point is that it is necessary to use the terms that are consistent with the rest of the contract or subcontract document in which they are used. Here are those options for consideration:
Long Version:
MATERIALS PRICE INCREASES: In the event that there are significant increases in the prices that Contractor pays for materials and supplies for the work to be performed between the date the Agreement is signed and the date that materials are purchased for the work to be performed, Contractor shall be entitled to additional compensation from Customer as described herein. A significant increase in price is defined herein as an increase as to any specific items of materials of _____ percent (__%) or more. In such a case, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any such items of materials has increased beyond __%. This would apply, but not be limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment. Contractor is entitled to demonstrate this price increase through the use of quotes, supplier list prices, invoices or receipts, when requested. Contractor shall not be responsible for increased prices of materials except as stated herein whether caused by delays, shortages, tariffs, or any other condition resulting in price increases.
Shorter Version:
MATERIALS PRICE INCREASES: Contractor shall be entitled to additional compensation from Customer when the price for any materials to be used on the Project increases _____ percent (__%) or more between the time the Contract is signed and materials for the project are purchased. In such a case, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any item of materials has increased beyond __%. This would apply, but not be limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment. Contractor is entitled to demonstrate this price increase through the use of quotes, supplier list prices, invoices or receipts, when requested.
Shortest Version:
MATERIALS PRICE INCREASES: When the price for any item of materials to be used on the Project increases _____ percent (__%) or more between Contract signing and materials purchase, Customer shall pay to Contractor, on request, all sums by which the cost to Contractor for any materials item has increased beyond __%, as demonstrated by Contractor. This includes but is not limited to price increases in lumber, plywood, steel, sheet metal, roofing materials, fuel, manufactured products and equipment.
Note Regarding Conditioning Your Bid or Proposal to Your Own Terms:
It is common for a construction subcontract to incorporate various outside documents which then become a part of the subcontract. These incorporated documents usually include the prime contract between the owner and the prime contractor, the plans, specifications and general conditions for the project. However, contractors seldom include the subcontractor’s bid or proposal among those documents incorporated. It is therefore very important that subcontractors have a well-developed proposal or bid and ensure that the proposal or bid becomes part of the subcontract document, the same as other documents which are incorporated. It is also important that the proposal or bid contains language so that the proposal or bid will control over those situations where later language may contradict the proposal or bid. Subcontractors should consider adding language like the following into their bid or proposal (subject to review by their legal counsel):
“Notwithstanding the language in any subsequently signed subcontract, Contractor agrees that this Proposal (or Bid) shall be incorporated into the subsequently signed subcontract and also agrees that the terms of this Proposal (or Bid) shall control and take precedence over the terms of any subsequently signed subcontract. Contractor further agrees that even if this Proposal (or Bid) is not specifically referenced in that subcontract as having been incorporated, that this Bid or Proposal shall be and is in fact incorporated into that subcontract. Contractor agrees that the foregoing is a material term of this Proposal (or Bid) and Contractor accepts the Proposal (or Bid) and the foregoing in full without reservation.”
The above is just an example of language which may prove helpful to achieve the incorporation of stated language in a subsequently signed agreement. Language like the foregoing in a bid or proposal can serve the subcontractor well to help ensure that terms like a price escalation clause and other favorable terms actually become part of the subcontract. This approach can be used by contractors against owners as well as by subcontractors against contractors.
Conclusion:
When contractors and subcontractors encounter situations on a project that are not properly addressed by the terms of their contracts and subcontracts, it is time to revise the operative document. With the recent threat of tariffs and corresponding increases in the prices of building materials, contractors and subcontractors would do well to consider a clause to protect themselves from such events. Even though inflation is beyond the control of contractors and subcontractors, the right contract language can at least help to weather the storm by reasonably spreading the risk. Those who actively protect themselves with protective contract language are more likely to withstand difficult economic times.
Article written by William L. Porter, Esq. in 2025. Mr. Porter is a principal in Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com.
