Material Shortages & Price Increases

By Trent Cotney, Cotney Attorneys & Consultants.

The industry experienced significant material shortages last year resulting in delayed schedules and price increases.

As 2021 progresses, many contractors are seeing an uptick in work, and they are optimistic about the months ahead. However, the effects of the global COVID-19 pandemic are continuing in the form of supply disruption. Over the last year or so, the industry has seen material shortages due to production stoppages and massive storms. These shortages can impact future roofing projects by not only delaying schedules but also increasing prices.

Supply disruption

As the pandemic spread internationally last year, some geographic regions shut down completely. Local laws adversely affected several manufacturers that had to close, fell behind on their production, and took some time to ramp up again. Other manufacturers stayed open but reduced production out of concerns associated with COVID-19.

In addition, closed borders—both with Canada and beyond—affected supply distribution. Some borders are still closed, and transportation systems are still recovering, which will make it challenging to receive shipments in the coming months. The price of diesel fuel and trucking costs has also escalated.

Even though COVID-19 is a significant contributing factor to the supply chain disruption, weather events in the United States also affected material distribution in the last year. The El Derecho storm in Iowa and Illinois caused significant damage. There were 17 confirmed tornadoes, which resulted in $7.5 billion in damage. In addition, the nation also saw five named hurricanes, as well as other destructive weather systems.

Although there was concern about a downturn in construction, the roofing industry has remained resilient. We now face a crisis where backlog is continuing to increase but roofers cannot get the materials needed to complete projects.

Increased costs

From January 2020 to January 2021, various materials have seen substantial price increases. Fabricated structural metal products saw a price increase of 3.2%, while steel mill products went up 7.4%. Even more concerning, iron and steel prices increased by 15.6% in that same timeframe, and softwood lumber prices soared by 75% in some areas. You should also anticipate significant price increases for copper and brass, insulation materials, gypsum products, concrete, asphalt, sealants, adhesives, coatings and many other materials critical for roofing construction.

In 2021, construction material costs have risen so sharply that the Associated General Contractors of America issued a Construction Inflation Alert. The organization noted a 12.8% jump in prices for construction projects since the beginning of the pandemic.

Contract protections

To combat these increase prices and material delays, it is essential that you protect yourself contractually and through negotiations.

Payment components: First, consider how you are being paid. Fixed price contracts often bind you to fixed material costs. If you use a cost-plus method of payment, then you can get paid your actual costs, plus profit and overhead. This is easier said than done given that the majority of residential and commercial roofing work is fixed price.

You should also consider the time and materials component in your contract for extra work. For example, if you specify a fixed labor rate plus actual material costs for things like decking, soffit, gutter, etc., then you can insulate yourself from dramatic increases.

Another option is to include a timeframe for fixed prices in your contract, which will protect you from price increases. Here is one example of suggested wording, though you can adjust the time limit and percentage as needed: “The quoted prices for materials are good for 30 days. After 30 days, Owner can anticipate a price increase based on escalating costs for materials of at least 5%.”

Price acceleration clause: When you include a price acceleration clause in your contract, you need to consider a few elements: how much pricing can go up without the need for a change order, the fact that you will need to show evidence of increased costs, and how much pricing can increase before there is a cancellation option. Below is suggested wording for such a clause:

If there is an increase in the actual costs of the labor or materials charged to the Contractor in excess of 5% subsequent to making this Agreement, the price set forth in this Agreement shall be increased without the need for a written change order or amendment to the contract to reflect the price increase and additional direct cost to the Contractor. Contractor will submit written documentation of the increased charges to the Prime Contractor/Owner upon request. As an additional remedy, if the actual cost of any line item increases by more than 10% subsequent to the making of the Agreement, Contractor, at its sole discretion, may terminate the contract for convenience.

Material availability: You must also address the issue of material availability. Include in your contract a provision that states: if you are unable to get the necessary materials for a given project, you will notify the customer, and the customer will agree to provide a time extension.

Change orders and other documentation

If you realize that prices have increased, materials are in short supply, your scope of work has changed, or you need more time, it is imperative that you submit a change order. If your customer fails to respond to the change order, be sure to effectively document the file to help your claim chances in the future. Follow up with emails, reports and other documentation that describes the issues you are facing. Detail that you are continuing work, having informed the customer of the need for a change order, even if the customer does not execute the change order. It is critical that your paper trail supports any legal claims you need to make later.

Reliable suppliers

To efficiently manage your materials, be sure you have a good relationship with reliable suppliers. Your ability to work well with a supplier likely depends on your reputation, your company size (and volume), and your longevity in that supplier relationship. When you and your supplier trust one another, you may have the opportunity to lock in pricing based on guaranteed volume, and you can pre-purchase supplies and arrange for their storage. You will also be well-positioned to stock up on supplies you need, and you have a better chance of securing materials during storm seasons and other challenging times.

Also, be sure to watch the market and note the supply trends. That way, you can anticipate shortages before they happen, which allows you to plan ahead.

Clear communication

Whether you are experiencing price increases, materials delays, or any other issues, you must keep your customer informed. The two main issues that lead to litigation are ambiguity (mentioned earlier in reference to contracts) and poor customer service. If you communicate clearly with your customers—keeping them informed about potential obstacles and managing their expectations—you have a good chance of maintaining a productive relationship with them and completing your project in a way that satisfies everyone.

Learn more about Cotney Attorneys and Consultants in their RoofersCoffeeShop® Directory or visit www.cotneycl.com.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

About Trent Cotney

Trent Cotney is an advocate for the roofing industry, General Counsel of the National Roofing Contractors Association (NRCA) and several other industry associations. For more information, contact the author at 866.303.5868 or go to www.cotneycl.com.