Inflation presents one of the most challenging pricing environments for construction contractors. Between bid submission and project completion, costs can rise significantly, eroding margins on fixed-price contracts. Understanding how to bid strategically during inflationary periods is essential for protecting profitability.
Understanding Inflation's Impact on Construction
Where Costs Rise
Inflation affects multiple cost categories:
Materials
- Commodity prices (steel, lumber, copper)
- Manufactured products (equipment, fixtures)
- Fuel and petroleum-based products
- Supply chain disruptions compounding effects
Labor
- Wage pressure from tight labor markets
- Union contract escalations
- Benefits cost increases
- Competition for skilled workers
Equipment
- Purchase prices for machinery
- Rental rates
- Fuel costs
- Parts and maintenance
Subcontractors
- Passing through their material increases
- Labor cost escalation
- Reduced willingness to hold prices
- Shorter bid validity periods
The Timing Problem
Construction's unique challenge:
- Bid today based on current costs
- Lock price for 60-90 day bid validity
- Start work months after award
- Complete project 12-24+ months later
- Get paid after work is performed
Each step represents exposure to price increases.
Pricing Strategies for Inflation
Escalation Allowances
Build expected increases into base price:
Fixed Escalation Allowance
Base estimate: $1,000,000
Expected inflation (18 months at 5%): $75,000
Total bid: $1,075,000
Risk: Overestimate and lose bid; underestimate and lose money.
Material Escalation Clauses
Transfer price risk to owner:
How They Work
- Base price uses current material costs
- Contract includes escalation clause
- Actual cost increases passed through
- Documentation requirements specified
Sample Language "Material costs are based on prices as of [date]. If material costs increase more than 3% between bid date and purchase date, Contractor shall be entitled to a change order for the difference."
Split Pricing
Separate volatile from stable costs:
Labor and fixed costs: $600,000 (fixed)
Materials (subject to adjustment): $400,000
Total: $1,000,000
Owner accepts material risk; contractor accepts labor risk.
Shorter Bid Validity
Reduce price lock period:
- Standard 60-90 days may be too long
- Request 30-day validity
- Include price reconfirmation requirement
- Specify when prices will be requoted
Time-and-Materials Alternatives
When fixed pricing is too risky:
- Guaranteed maximum price (GMP)
- Cost-plus with fixed fee
- Unit pricing with material adjustment
- Hybrid approaches
Contract Risk Management
Contract Terms to Negotiate
Material Escalation
- Specify which materials are subject to adjustment
- Define base prices and documentation
- Set threshold before adjustment applies
- Establish calculation method
Schedule Adjustments
- Link schedule to price assumptions
- Allow extension if material delays occur
- Include force majeure provisions
- Protect against owner-caused delays
Payment Terms
- More frequent progress payments
- Reduced retainage
- Faster processing times
- Material payment upon delivery
Terms to Avoid
Red Flags During Inflation
- Long fixed-price commitments
- No escalation protection
- Excessive bid validity periods
- Delayed payment terms
- High retainage percentages
When to Walk Away
Some projects aren't worth the risk:
- Multi-year fixed price with no escalation
- Owner refuses any price protection
- Unreasonable payment terms
- Scope heavily dependent on volatile materials
Estimating Adjustments
Material Pricing Approach
Get Current Quotes
- Price materials closer to bid time
- Specify quote validity period
- Document supplier pricing
- Build relationships for firm pricing
Add Contingency
- Material price contingency line
- Scale to project duration
- Adjust for material volatility
- Be transparent (or not) per strategy
Track Trends
- Monitor commodity indices
- Follow industry price reports
- Understand supply chain issues
- Predict near-term movements
Labor Pricing Approach
Rate Escalation
- Apply annual escalation to labor rates
- Use actual upcoming wage increases
- Include benefit cost trends
- Factor in market competition
Productivity Considerations
- Material delays affect productivity
- Substitutions may require different methods
- Supply issues cause starts/stops
- Factor productivity loss into pricing
Subcontractor Pricing
Secure Prices Earlier
- Get sub prices before bid deadline
- Confirm price validity period
- Document any escalation conditions
- Have backup subs identified
Build in Contingency
- Assume some sub prices won't hold
- Include sub buyout contingency
- Plan for price reconfirmation
- Budget for market increases
Project Selection During Inflation
Favorable Project Characteristics
Look for projects with:
- Shorter duration (less exposure)
- Owner willingness to share risk
- Less material-intensive scope
- Favorable payment terms
- Experienced owner who understands market
Projects to Approach Carefully
Higher risk opportunities:
- Long duration (2+ years)
- Material-heavy scope
- Fixed price requirement
- Rigid specifications (no substitutions)
- Slow-paying owner
Bid/No-Bid Adjustments
Factor inflation into go/no-go:
| Factor | Lower Risk | Higher Risk | |--------|-----------|-------------| | Duration | < 12 months | > 24 months | | Material % | < 30% | > 50% | | Escalation clause | Included | None | | Owner type | Experienced | First project | | Payment terms | Net 15 | Net 45+ |
Execution Strategies
Early Procurement
Lock prices through early buying:
- Order long-lead items immediately after award
- Secure material quotes before contract signing
- Use owner's credit for early orders
- Store materials if necessary
Value Engineering
Reduce exposure through alternatives:
- Propose substitute materials
- Suggest different methods
- Identify cost-effective alternatives
- Share savings with owner
Schedule Optimization
Minimize duration and exposure:
- Accelerate material-intensive phases
- Fast-track procurement
- Parallel activities where possible
- Reduce overall project timeline
Supplier Relationships
Leverage relationships for protection:
- Negotiate price protection periods
- Arrange blanket orders
- Build supplier loyalty for priority
- Diversify supply sources
Communication with Owners
Setting Expectations
Help owners understand:
- Market conditions affecting pricing
- Rationale for escalation requests
- How risk sharing benefits project
- Comparison to alternatives
Documentation
Support your position:
- Provide market data
- Reference industry indices
- Show supplier price quotes
- Demonstrate good faith efforts
Ongoing Communication
During project execution:
- Alert to potential escalation triggers
- Document cost increases promptly
- Submit change orders timely
- Maintain transparent relationship
Market Awareness
Key Indicators to Monitor
Material Indices
- Steel prices (Platts, AMM)
- Lumber futures
- Copper prices
- PVC and petroleum products
Labor Indicators
- Employment reports
- Wage growth data
- Union settlement trends
- Trade publication surveys
Economic Indicators
- CPI and PPI
- Federal Reserve policy
- Interest rates
- GDP growth
Industry Resources
Stay informed through:
- ENR cost indices
- Trade association reports
- Supplier market updates
- Economic forecasts
Conclusion
Bidding during inflationary periods requires adjusting your strategy across the entire process - from project selection to pricing to contract terms to execution. The contractors who maintain profitability are those who:
- Select projects with appropriate risk profiles
- Price with appropriate escalation allowances
- Negotiate contract terms that share risk fairly
- Execute with strategies to minimize exposure
- Communicate transparently with owners
Inflation is part of the economic cycle, and construction will always face periods of cost pressure. Building the skills and systems to navigate these periods protects your business and positions you for success when conditions stabilize.
ConstructionBids.ai helps you find opportunities that match your risk profile, with project details that help you assess inflation exposure before investing in estimating.
