Lumber prices have skyrocketed

since mid-April, rising 130% and increasing the cost of a single-family home by more than $16,000, according to estimates from the National Association of Home Builders (NAHB). NAHB has been asking the Trump Administration to call on domestic lumber producers to ramp up production to ease growing shortages and to make it a priority to work with Canada on a new softwood lumber agreement that would end tariffs averaging more than 20% on Canadian lumber shipments into the United States.

How can builders address such unexpected increases in building materials? Adding an escalation clause to contracts may help.

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.

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.

Cost Escalation Contract Addendum Example

NAHB’s Construction Liability, Risk Management and Building Materials Committee has created a sample cost escalation clause contract addendum. Visit https://www.nahb.org/Advocacy/Legal-Issues/Construction-Liability and click “Trending Topics and Issues” to find this resource.