7 Coping Strategies for Volatile Steel Prices

The COVID-19 pandemic has disrupted steel supply and demand throughout the world. The problem was especially bad in the early months of the crisis. As the global economy and steel industry have reacted, steel prices have generally risen.

Although prices are expected to stabilize at some point, contractors may still see occasional spikes. Here are seven strategies to keep in mind:

1. Adjust your bids. Consider building some cushion into your bids to reflect the risk of price increases, being careful not to price yourself out of competition for jobs. Also, look into whether you should bid on more low-risk jobs, which are typically less vulnerable to changing material prices.

2. Put an expiration date on your bids. Keeping bids open for a relatively short time (30 days, for example) can help protect against sudden fluctuations in the price of steel or other materials. You can always extend the time, if appropriate, provided you confirm the price of materials beforehand.

3. Buy in advance. Purchasing steel or other materials in advance can help you lock in current prices and avoid shortages, provided you have a good handle on your needs and can weather the storage costs and impact on cash flow. Try to negotiate contracts that provide for release of funds early enough to buy in advance when needed.

4. Include escalation clauses in your contracts. These clauses shift some of the risk of fluctuating steel prices to owners by providing for periodic price adjustments that reflect the changing costs. Despite the name, owners will be more likely to accept these clauses if they also provide for downward price adjustments in the event steel prices drop.

Design escalation or price adjustment clauses carefully to clarify when prices will be adjusted, under what circumstances and by how much. For instance, these clauses usually provide for an adjustment if changes in a material’s price exceed a certain threshold (such as 2% or 3%), as evidenced by a published price index or, in some cases, by the contractor’s actual supplier invoices. It’s also common for prices to be adjusted at fixed intervals (for example, quarterly) during a job or at the end of the contract.

5. Review existing contracts. Find out whether existing contracts contain escalation or price adjustment clauses. If not, determine whether other contractual provisions, such as force majeure or change-in-law clauses, are written to protect you against sudden materials shortages or price increases. Consider specifying in future contracts that unavailability of certain materials is an excusable delay under a force majeure clause.

6. Establish agreements with fabricators. If you use prefabricated building products, consider the impact of rising steel prices on fabricators. If possible, secure written agreements with them that lock in prices for a specified period.

7. Excel at communication. Whichever strategies you use to mitigate the impact of volatile steel prices, put the effort into developing and maintaining strong supplier relationships. Good communication will help you keep abreast of developments that may affect prices. You’ll be more likely to learn about opportunities to lock in prices for specified periods, as well as to gain access to the materials you need when there are shortages.

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