Ongoing issues in the supply chain demand new strategies from contractors as they battle shortages, extraordinarily long lead times and skyrocketing prices. The May report from the Associated General Contractors of America (AGC) shows the producer price index (PPI) for material and service inputs to new nonresidential construction is up 18.9 percent year over year. That pricing pressure is cutting into contractors’ profit margins, despite an increase in their bid prices to adjust for them. “Contractors are working with tighter margins than ever, and need to leverage every tool possible to protect their companies and the projects they’re working on. Their surety can be an important partner in identifying and utilizing those tools,” says Jason Dettbarn, Senior Vice President, Contract Underwriting, Merchants Bonding Company.
Tools & Strategies
So what tools and strategies are available to contractors to affect their overall surety limits?
Contracts - specific clauses and language to consider:
- Bid language that provides an adjustment allowance for increased material costs above the pricing reflected in the bid. The bid should clearly state how long bid prices are good and at what point adjustments can be made in the event awarding of the contract is delayed.
- A price escalation clause in the construction contract to pass material price increases to the owner. The price escalation clause should specifically identify applicable materials and establish the parameters for a price adjustment.
- A change order provision that allows for modification to the contract due to material price increases. The clause should identify the type of documentation required to substantiate the change order request due to increases in material pricing.
Internal Controls: Tightening up the job costing process across the lifecycle of projects provides a window into the business that can yield a much more accurate picture. Imbalances can be spotted more quickly, and actions taken to offset them.
Procurement protocols: Dedicate time and resources to finding and approving alternative material sources, and developing partnerships with key suppliers.
Labor management: Many industries face the tough task of attracting and retaining good workers, and with labor shortages at an all-time high, there are important short and long term strategies the construction industry can use to help itself create a qualified workforce. Individual contractors can provide training, offer better pay and benefits, and look to unexpected sectors, like veterans or active-duty military looking to transition careers, to attract new people. The construction industry can invest in training programs and internships, offer apprenticeships and create relationships with community colleges and vocational schools, all of which can contribute to a more consistent pipeline of qualified workers.
A combination of good business practices and well-crafted contracts can make the difference during these volatile times, and help maximize your surety credit. Contractors can always look to their surety for advice and support. A surety’s construction expertise and familiarity with markets and industry trends can assist contractors in protecting themselves and avoiding potential pitfalls.