Updated: Jul 23
Material prices are on the rise. Often cited as Covid-19 disruption and freight delays raising freight costs but the truth is demand for new builds is far outstripping supply. E.g. a shortage of locally sourced feed-stock to create engineer timber beams for the housing industry December 2020 to March 2021 in the face of a near on 50 year record high number of Dwelling consents March 2021.
The Risk of Estimating for Rising Prices is that if you add too much for inflation you will not win the job and if you do not add enough, you will lose your shirt. The rate of prices rises is far greater than anything seen in recent living memory, but for us oldies, we have fond memories of the 1980’s double digit inflation and mortgage rates, even cash deposits were above 10%. The problem with the large time gap, between bouts of fast paced rising prices, is we have forgotten how we dealt with it last time.
This is where Marty McFly Jr, hops into his dad’s vintage DeLorean and returns to 1985.
It’s the same as last time. Large building organisations having greater pull on the supply chain. During times of sufficient supply they command greater discount for bulk supply. During times of short supply they have the bank balance to pay the price demanded to secure preferred supply arrangements.
When jobs are falling into your lap, you could just increase your margin to cover the rising price risk. Better to lose a job than lose your shirt? But there is another way, where your client takes the risk and you don’t waste pricing overheads on lost jobs. It is time to move away from lump sum "fixed" pricing and go back to lump sum pricing with a fluctuation’s mechanism (increased costs recovery).
THE RETURN OF FLUCTUATIONS
For the builder who does not want to take large risks or waste overheads, due to uncertainty of future material costs, transferring the risk, is fair. The client should always pay a price that covers actual cost and returns a profit margin to the efficient operator. This allows the builders competing at tender time to put there best price forward based on today's rates, removes the gamble of guessing what cost increases might be, and allows the client to assess this risk in isolation with competitive prices underpinning the project.
Ask a senior quantity surveyor about the recovery of post tender price fluctuations by the "individual verification method". A simple accounting exercise, comparing actual invoiced cost to tender prices. Selling the benefit of carrying price escalation risk, should come with a recommendation the client seek budgeting advice from an independent quantity surveyor.
By Matthew Ensoll
Editor New Zealand Building Economist.