Given the dramatic increase in softwood lumber prices, builders should consider adding an escalation clause to contracts in order to address unexpected price increases in building materials.
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.
Cost Escalation Contract Addendum Example
NAHB’s Construction Liability, Risk Management and Building Materials Committee has a sample cost escalation clause contract addendum.
For companies with existing contracts, if they do not already have an escalation clause or similar provision in place to address increased prices, absent an amendment to the contract adding one, they may have difficulty trying to recover those higher costs. Consider consulting with your attorney for additional guidance and assistance with existing contracts.
Having an escalation clause should not be limited to contracts with a potential home buyer but should also be used in builders’ contracts with suppliers, subcontractors, or others who may be relying on building materials to complete all or part of a project.
Finally, think about your business, evaluate your supply chain and identify other options in the event some of your materials are delayed or your costs increase. Have a plan in place to handle potential supply chain disruptions.