Buyer price escalation clause. Any limits?

Question

Hello,

I have a contract with a builder that has the following clause and I am being told I need to pay 10% over the previously signed contract price due to increase in lumber price (which seems to have fallen 3X since I signed contract in late April this year). Is there any limit on the % by which they can raise the build cost? What are my options?

14. PRICE ESCALATION

In the event of significant delay or price increase of material occurring during the performance of the
contract through no fault of the Contractor, the contract sum, time of performance, and contract
requirements shall be equitably adjusted by change order in accordance with the procedures of the
contract documents. A change in price of an item of material shall be considered significant when the
price of an item increases 5% percent between the date of this contract and the date of installation.

Theresa Harris · Answer

I know lumber has increased, but I find it hard to believe that it has increased so much that the increase alone represents 10% of the property purchase price since April when prices were already high.  I'd talk to your lawyer.

Arjun S. · Answer

Thank you all for your insights! More I read, looks like this is very common with all new construction homes. Though in the contract I don't see anything else relevant to "in accordance with the procedures of the contract documents" mentioned under the price escalation clause. I have reached out to them for clarification. And yes like several of you mentioned it just can't be lumber and there might be something more to this. I will ask them for additional supporting documentation to justify the pricing.

@Michael Guzik: Good to know you are from San Antonio! Yes prices in the area have been skyrocketing lately and I see no end to it! I will reach out to them to see if they can provide any documentation to support this.

Michael Guzik · Answer

@Arjun S. This is a great question man, unfortunately that is the market we are in right now. It's the Wild West out here! I'm a bit south of you here in San Antonio and I work with a builder regularly on new construction homes, duplex's and condo's. The lumber FUTURE's have decreased but that direct price decrease is just now hitting the market and I can tell you it certainly isn't going down by 3x. Copper, metals, and OSB all continue to increase in cost, so just because lumber goes down doesn't mean everything else does. We get bids and 30 days later they are no longer valid and the price of the product or service has increased by 5-10%. I'm currently dealing with this on garage doors and paint for a house and man is it frustrating!

These clauses are there to protect the builder and the trades from losing money. There is no limit to what they can charge because it is dependent on current market prices which are out of their control. I would absolutely ask to see the bids or documentation to prove what they are saying to confirm this! These clauses are usually pretty straight forward, you either pay up, or the contract is terminated, and they turn around and sell the finished product for even more.

Waylon Zook · Answer

@Arjun S. Bear in mind that the lumber futures have only recently begun falling. Prices what contractors pay have not fallen as much yet. Contractor may have purchased lumber at top of market.

Matt Devincenzo · Answer

As stated above what are the procedures? Paying for the additional material cost on say lumber may not represent 10% additional to the entire home's price...maybe it does? But the procedures will tell you how they should present the extra to you for approval.

These aren't uncommon in project contracts that take a longer time...I know homeowner's like a 'fixed price', and it works on a remodel that spans a couple months, but in development type projects the schedule is too long to lock things in. It's also not new remember my Dad dealing with material price escalations in the early 2000's due to oil pricing. Bids were given as a margin over some index sometimes, or a fixed fee above the spot price the day of install or scheduling etc...the client had the risk of oil going up or down and then pricing was locked as the work was completed. It's the only way to do it when there's a lot of volatility in the materials market.

Ronald Allen Barney · Answer

"in accordance with the procedures of the contract documents"

You'll want to find those procedures referenced.

Buyer price escalation clause. Any limits?

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