Escalating Materials Prices Turn Construction Bids Into a Gamble

Rising prices for steel, copper, brass, lumber, laminate sheeting and plastic-based materials, such as PVC pipe, are particularly hard to predict and factor into bids, according to executives. Inventories of materials remain tight because of production and transportation bottlenecks as well as growing demand. That has juiced some prices to record levels, including the U.S. spot-market price for coiled sheet steel, which has increased by more than 80% since the start of the year.

At Harper Construction Co., a San Diego-based construction contractor specializing in projects funded by the federal government, its president,

Jeff Harper,

said he has shelled out about $2 million this year to cover materials costs that exceeded his bids.

“It’s a real gamble,” Mr. Harper said. “It’s tough right now to figure out how to get work against a dozen competitors and not lose your tail in the process.”

Mr. Harper’s company constructs office buildings and other structures for federal agencies and the military. He said federal contracts typically have no provisions for contractors to recover higher costs for materials once a bid is accepted.

For manufacturers and builders, months can pass between the time bids are submitted and when the actual work begins. In the past, materials suppliers typically guaranteed prices for 60 to 90 days and often stuck to those prices if orders came in later than that, executives said. Now suppliers are quoting prices for just a week or two, and many aren’t honoring them beyond that, as prices steadily climb.

“Right now, I’m not giving any quotes on steel that I don’t own or am real confident of owning in the next 45 days,” said

Lisa Goldenberg,

president of Delaware Steel Co., a distributor near Philadelphia.

As a result, executives said they are doing more estimating on materials expenses than ever before. That can be risky when prices are rising. Companies that build in too many price increases into their bids can be easily underbid by competitors who don’t. Underestimating exposes building and manufacturing companies later on to higher costs, which their customers are often unwilling to cover once a contract is signed.

Jody Giacomini,

president of Cathedral Builders Inc., a Jackson, Wis.-based builder of cabinets and counters for commercial buildings, said her company usually waits months to get on a job site while a building’s exterior is being constructed. Lately, the prices the company is paying for plywood, adhesives, laminate sheets and other materials have increased so rapidly that they exceed the company’s bids. Ms. Giacomini said laminate sheets went up 3% in June and another 3% in July. Laminate prices typically increase 1% to 2% a year, she said.

“How do we price bids for two months down the road and still stay in business?” she said. “There’s no price certainty.”

Accu-Swiss Inc., an Oakdale, Calif.-based manufacturer of small metal parts for medical equipment and aerospace components, is flooded with orders. But its president,

Sohel Sareshwala,

said Accu-Swiss is losing money for the first time after 21 years in business. He said he can’t recover most of the rising costs for stainless steel and aluminum, as well as brass, which has more than doubled in price in the past seven months.

Customers typically offer Accu-Swiss fixed prices for batches of multiple parts, Mr. Sareshwala said. Pushing back on prices risks losing orders.

“Most of my business is repeat customers,” he said. “You can’t live in an environment where you’re constantly adjusting prices.”

Some companies have carved out protections in their contracts against rising costs.

Materials surcharges, similar to the fees used in the trucking industry to protect truckers against rapidly rising fuel costs, are increasingly turning up in contracts for manufactured goods.

Sean Gibbons,

chief executive for the upholstery-fabrics manufacturer STI Fabrics in Kings Mountain, N.C., said he has been paying a surcharge on polypropylene resin since March after a winter storm knocked out production at resin plants in Texas. Mr. Gibbons said he is passing that expense along in surcharges on the Revolution-brand synthetic fabric he sells to furniture makers, rather than raising prices.

“We typically don’t increase prices, and none of us have the margins to absorb these costs,” he said.

Keats Manufacturing Co., a maker of brackets, clips, bushings and other metal parts for the automotive, electrical and appliance industries, recently started adding surcharges to its contracts for rising metal expenses, particularly stainless steel.

Wade Keats,

the Wheeling, Ill., company’s co-chairman, said he is buying more steel than he needs at the moment in anticipation of still-higher prices ahead.

“It’s the only way we can keep up,” Mr. Keats said. “We’re holding more inventory than we ever have.”

—Austen Hufford contributed to this article.

Write to Bob Tita at [email protected]