Managing Sudden Price Hikes

We’ve seen this before. The COVID pandemic taught the building industry just how quickly construction material prices can fluctuate wildly, up to and including the $10 2x4s we saw for a brief period in my area of northern California—yikes, no builder saw that coming! Some current economic and political indicators strongly suggest that builders may be headed for another bumpy material-price-fluctuation ride in 2025 as a result of new tariffs being placed on lumber, steel, goods, and construction-related raw materials and products being imported into the U.S. from other countries.

During COVID, many builders with a signed fixed-price contract wondered what they could and should do when they placed a lumber order and found out that the bid they had received several months earlier went up by 100% or 200%. Who would pay that extra cost, the homeowner? The contractor? Would they split it?

Many disputes and financial losses arose out of that unanticipated spike in prices. Many a builder had sleepless nights and difficult conversations with homeowners about who should pay for these unforeseen significant material price increases, and some builders ended up losing a good percentage of their profit on certain jobs by being forced to absorb the increases.

Flash forward a few years to the present and ask yourself if we are possibly headed for a repeat of sudden and significant construction material price spikes this year as a result of new tariffs or other economic factors. Lumber suppliers have certainly learned how to deal with sudden price increases and pass them on to the builder and consumer; the question is, have we builders? Are we prepared to deal with unanticipated price increases with our customers and in our construction agreements so we don’t have to absorb a major financial hit?

Hello Tariff-Related Price Spikes

What will happen to the builder in 2025 who is relying on a material estimate that is several months old—and part of a signed, fixed-price contract—when they are caught in the crosshairs of sudden, significant material price increases caused by tariffs, and they’re forced to absorb these increases? The outcome and the losses for many builders who have not taken preventative contractual steps are fairly predictable and may well be reminiscent of the losses many builders suffered because of spiked material costs during the COVID pandemic.

Rebar, structural steel, piping, and duct work have already been facing significant price volatility since the beginning of 2025. Mexico, Canada, and China are facing steep new tariffs. Prices on gypsum used in drywall (about 72% of imports coming into the U.S. come from Mexico), softwood lumber (about 74% of U.S. imports come from Canada), and various other goods and materials, especially if being imported from Canada, Mexico and China, are expected to rise sharply this year.

Lumber production in the U.S. is supposed to rise, but how quickly will existing U.S. lumber mills be able to handle the increased milling? Will they be able to get enough milled lumber to the U.S. market on time in 2025 to remove the need for imported lumber? Or will builders still have to pay for the higher priced, tariff-laden lumber this year and in the foreseeable near future?

As of this writing, the National Association of Home Builders (NAHB) has estimated that tariffs could raise the cost of imported building materials by over $3 billion and the cost of building a single-family home by $7,500 to $10,000. The imposition of new and substantial tariffs as a result of executive orders has been a dizzying on-again, off-again proposition so far this year. Many material prices, including steel, aluminum, and the lumber futures market, already started to go up earlier in the year.

Perhaps prices will or won’t spike right after you sign your next big fixed-price contract for that new project, but exact timing and extent of price increases is impossible to predict. One thing that is fairly easy to predict is that uncertain times like these are more likely to bring volatile price fluctuations (mostly increases).

So what can a builder do when putting together fixed-price contracts that incorporate material pricing that may be several months old by the time the materials or products get ordered?

Pros and Cons of an Escalation Clause

First, let’s consider the pros and cons of attempting to insulate against significant price increases with an escalation clause in the construction agreement. An escalation clause calls for an increase in the price charged for certain materials or labor if the builder’s costs suddenly increase because of tariffs, supply chain disruptions, or other significant unforeseen economic forces that have come down the pike since the owner and contractor signed the construction agreement.

The escalation clause is an attempt to transfer the risk of sudden increased material and possibly certain subcontractor costs to the homeowner after the contract has been signed. Why the owner? The goal is that in times of pricing uncertainty—like the pandemic, tariffs, major supply chain disruptions, and the like—the builder is not forced to absorb sudden increased costs or to buffer their fixed-price contract amounts with “SWAG” contingency guesses about how much certain materials might spiral in cost by the time materials are ordered.

From the builder’s perspective, the need and justification for an escalation clause in a construction contract is similar in many ways to the need and justification for a concealed conditions clause. In both cases, the builder wants contract language that ideally protects them from having to absorb possible job costs not known about and therefore not factored into the construction agreement at the time it is signed by the owner.

The escalation clause typically calls for the builder to document and show the owner what the builder has to pay for the materials when ordered compared with what the line-item bid cost of the materials was so that the owner can be charged for the increased material cost. The builder may also want to include certain subcontractors, like electrical and drywall, in the clause in case their bids and pricing are not honored because their material prices also suddenly spiked since they issued their bid. Some builders, in an effort to be fair and not have the escalation clause rejected by the owner, may also want to pass any price decreases in specific material costs on to the owner to balance the risk more fairly between the owner and builder.

The escalation clause may be especially useful where the time span between issuing the contract and ordering the materials is many, many months, which often happens with bigger projects. Some larger projects can easily take 12 to 18 months, a near eternity when it comes to forecasting the future prices of things such as lumber, drywall, steel, concrete ... With price stability in the local market, this time span makes little difference in the bid vs. the actual cost of materials, but with tariffs on the horizon, the time span may make a huge difference between the bid and the actual cost of materials.

How is an escalation clause triggered? That depends on how it is written and how the builder wants to manage the risk of increased material costs. Many builders may want to have the trigger be simply the difference between the bid price and the actual cost when materials are ordered. Or, the triggering event can be a percentage difference that is something like 2% or 4% above the estimated material cost or subcontractor bid amount or whatever the builder and owner agree to as the threshold for when the escalation clause will become effective.

Sample Escalation Clause

“Material/Subcontract Price Escalation: The contract price for this Agreement has been calculated based on prices for the component building materials and subcontractors at the time the project was bid. However, the market for building materials and subcontractors has been volatile and sudden price increases could occur due to tariffs, supply chain disruptions and other factors beyond Contractor’s control. The Contractor agrees to use best efforts to obtain competitive prices from available building material suppliers and subcontractors during the project, but should there be a sudden increase in the prices of building materials or subcontractor work that are purchased after execution of contract, the Owner agrees to pay that cost increase to the Contractor. Any claim by the Contractor for payment of a material or subcontractor cost increase shall require Contractor’s written notice to Owner along with full documentation showing the price bid, the price paid at time of ordering, price difference, including copies of backup documentation such as estimates, invoices, subcontract agreements, etc... As a gesture of goodwill, Contractor shall not mark up any price increase triggered by this clause with profit and overhead.”

Above is a simple sample escalation clause. There are many ways to write an escalation clause . Be sure to review any escalation clause you want to use with your attorney before inserting one into your construction agreement.

The Importance of Documentation

Proper and transparent documentation of material bid costs and actual material costs is essential if you plan on submitting an invoice to the owner for additional costs based on the escalation clause. If subcontractors are included in the escalation clause, showing the original subcontractor estimate and the revised subcontractor estimate with a justification from the subcontractor about how the materials spiked since the original estimate was given is important.

A builder may or may not want to waive markup on the increased cost, as in the sample clause above. An argument in favor of waiving markup is that it may help encourage the owner to sign a construction agreement that includes an escalation clause. Also, the more the builder can limit the clause to lumber or to lumber and a few other areas or subcontractors, the more willing the owner may be to sign the agreement. Keep in mind that if copper or drywall prices spike and the electrician or drywall subcontractor refuses to honor its original estimate, including subcontractors in the escalation clause (as in the example above) may protect the builder from absorbing the higher price of a replacement subcontractor.

Some owners may have a hard time understanding or accepting an escalation clause in a construction agreement, and the escalation clause may become a point of negotiation for the owner or the owner’s attorney. The owner may assume, or prefer, that the risk of all material price increases should fall on the builder. But is this fair or a risk the builder is willing to assume in times like these? The escalation clause, if not written well, understood by both parties, and administered well by the builder, may even lead to arguments and eventual legal disputes when the bill for additional costs is submitted to the owner.

Some builders may not like the escalation clause because the language may seem a little confusing. Some owners may feel taken advantage of by the few sentences in the escalation clause that could lead to a very large, unexpected price increase even though that increase has nothing to do with the builder and is not going into the builder’s pocket.

Alternatives to Escalation Clauses

Alternatives to the escalation clause include such things as using allowances for specific materials and subcontracts where pricing stability or information is in question. Or the builder can consider including an increased material cost contingency in the contract.

Allowances like the clause below are easy to define and may be more familiar to many owners than the escalation clause.

Sample Allowance Clause

“ALLOWANCE WORK: Payment for work designated in the Agreement as ALLOWANCE work has been factored into the Lump Sum Price of this Agreement and any Payment Schedule set forth in this Agreement. If the final amount of the ALLOWANCE work exceeds the line item ALLOWANCE amount in this Agreement, the difference between the final amount of the ALLOWANCE item and the line item ALLOWANCE amount stated in the Agreement will be treated as Additional Work and this difference is subject to Contractor’s profit and overhead at the rate of ____%. If the final amount of the ALLOWANCE work is less than the ALLOWANCE line item amount listed in the Agreement, a credit will be issued to Owner for this difference after all billings related to this particular line item ALLOWANCE item have been received by Contractor.”

Line-item contingency for increased material cost. The builder may also consider inserting a line item contingency in the contract for potential increased material costs. It may initially be factored into the lump sum contract amount. However, it may be difficult to know what amount to factor in and doing so may make the builder’s contract price less competitive with builders who don’t factor in this contingency.

Force majeure clause. The builder may also try to recoup sudden unforeseen increased material prices under a force majeure clause like the one below. In the absence of other clauses, this can be attempted but may not always be successful, because it is less specific than the escalation clause or allowances.

Sample Force Majeure Clause

“FORCE MAJEURE EVENTS: The Contractor shall not be liable or responsible to the Owner, nor be deemed to have defaulted under or breached any portion of this Agreement for any failure or delay in fulfilling or performing any term of this Agreement when and to the extent such failure or delay is caused by or results from acts beyond the Subcontractor’s control, including, but not limited to, Force Majeure events such as: (a) acts of God; (b) a natural disaster (c) epidemic or pandemic; (d) action by any governmental authority; (e) national or regional emergency; (f) strikes, labor stoppages, supply chain problems or shutdowns or other supply chain or work site disturbances caused by or related to the foregoing Force Majeure events.”

Last-minute price verification. It almost goes without saying that another thing the builder can do to minimize risk is to double-check with material vendors and subcontractors just before giving the owner the fixed-price contract to make sure the builder has up-to-date pricing. There’s no sense relying on and incorporating into the construction agreement a four-month-old lumber package bid if prices have already gone up.

Lessons Learned?

With lessons learned from the soaring price of lumber, copper wire, steel, and the like during the COVID era, a combination of allowances, an escalation clause, and a force majeure clause may be something to consider having in your construction agreement. These clauses all attempt to contractually shift the risk of sudden price increases to the owner when they were unforeseen and couldn’t reasonably have been factored into the builder’s fixed-price contract amount at the time the contract was prepared and signed by the parties.

Allowances have long been successfully used in construction agreements. Post-COVID, escalation clauses and the more general force majeure clause are becoming more common in construction agreements. If you decide to incorporate an escalation clause into the construction agreement, don’t forget it will require detailed recordkeeping and open-book transparency in regard to the items encompassed by the escalation clause. The devil is in the details when tracking increased costs and making a claim for those costs using an escalation clause or an allowance clause.

Trust Is the Best Currency

Trust is often the builder’s most valuable currency with the owner. Good, up-front communication with the owner about an escalation clause and allowances, along with proper administration of the documentation for them, is critical to maintaining that trust between the owner and the builder/remodeler. Good communication and trust also make presenting the owner with an invoice for increased material or subcontractor costs under an escalation clause or an allowance clause a little bit less likely to turn into a dispute over the bill.

Implementing one or more of the types of clauses above may help to mitigate financial losses in a period of material price instability and help the builder to avoid many arguments over who should absorb sudden and significant unanticipated tariff-driven material price increases in 2025. Again, consult with your own attorney before relying on the information herein or incorporating clauses into your construction agreement.