Cost Escalation: Managing Price Volatility and Lead Times
Escalation risk is now a permanent feature of modern construction. The goal is not to “predict the market perfectly”, but to build contractual and procurement mechanisms that prevent volatility from destroying margin.
1. Escalation Drivers
- Materials: steel, aluminium, plasterboard, concrete inputs, fuel.
- Labour: shortage-driven wage pressure and subcontractor availability.
- Lead times: windows, joinery, switchboards, HVAC equipment.
- Specification changes: compliance-driven upgrades (energy, BAL, acoustic ratings).
2. Procurement Strategy (What Actually Works)
- Early ordering: convert key quotes to purchase orders early, tied to program milestones.
- Approved alternatives: pre-approve equivalents to avoid re-design delays if supply fails.
- Supplier redundancy: avoid single points of failure on critical packages.
3. Contractual Tools
Approaches vary by sector and client appetite, but common options include:
- Fixed price with exclusions: exclusions for highly volatile items (transparent and agreed).
- Provisional allowances: for volatile categories with defined adjustment mechanisms.
- Rise and fall clauses: sometimes used in longer programs; methodology must be clear and auditable.
4. Estimator’s Checklist
- List long-lead items in tender clarifications and highlight program risk.
- Confirm quote validity periods and escalation conditions.
- Align program durations to realistic supply lead times, not best-case scenarios.
Expert tip: Most escalation pain is not the price increase itself—it’s the delay it causes. Lead time risk is margin risk.