Material Prices Move After You Quoted

Why this matters

Nobody loses a shop to a single material increase. Shops lose margin to the gap between the day they priced a job and the day they actually bought the material for it, because that gap is invisible, it is different on every job type they sell, and almost nobody has measured their own. The increase shows up on a supplier invoice weeks after the number was agreed, lands in job cost, and gets read afterwards as "that job went badly" rather than as a priced risk that was accepted without being sized.

The useful thing is that the size of that risk is knowable before it costs you anything, from two numbers you already have.

The exposure is a window, not a price

Your exposure on any job is not the price of the material. It is the product of two things:

• The exposure window. Days between the moment you commit to a number and the moment the material price is locked, which is when you place the order and the supplier confirms it, not when you get delivery.
• The material share of that job. The fraction of the ticket that is material rather than labour, permits, subcontract or travel.

A move in material price only reaches your margin through the material share, and the window decides how big a move you should plan for. Both matter, and one of them matters far more than people expect.

Write the exposure figure as material share multiplied by the window expressed in months. The unit it comes out in is points of the ticket per one percent of monthly material drift, and that is a number you can rank your own job types with once and keep.

Sizing your own exposure by job type

Your accounting system will give you the material share by job type without much effort. The window is harder only because shops guess at it. Do not guess. Pull the last twenty or thirty jobs of a type, take the date the quote went out and the date the purchase order was placed, and look at the spread rather than the average, because the tail is where the money goes.

Then get a drift rate for the category. Your own supplier quotations over the last six months are the best source you have, because they are the prices you actually pay. The Bureau of Labor Statistics Producer Price Index publishes monthly commodity-level series for construction materials free of charge; it will not tell you what your distributor does next week, but it will tell you whether the move you are seeing is your market or just your supplier.

A worked read: one shop, three job types, two markets

A residential shop sells three things. Its material shares and its measured quote-to-order windows:

Windows converted to months at 30 days. Gross margin on all three runs about 22 points, which is the figure the damage gets measured against below.

Calm market. The shop's own supplier quotations show that category drifting about 1 percent a month over six months. Replacement installs take 0.33 x 1 = 0.33 points off the ticket, which is 0.33 of 22 points, about 1.5 percent of the job's margin. Projects take 1.05 points, about 4.8 percent of the margin. Neither is worth an instrument that costs a sale.

Disturbed market. The same category runs 4 percent in a single month because a surcharge lands. Replacement installs now take 0.33 x 4 = 1.32 points, about 6.0 percent of the margin. Projects take 1.05 x 4 = 4.20 points, about 19 percent of the margin on every project in the book.

Here is the part that surprises people. The replacement install has the higher material share, 55 against 45, and the lower exposure, because the window multiplies while the share only scales. Project exposure is 4.20 divided by 1.32, about 3.2 times the replacement's, and that ratio is 1.05 divided by 0.33 in either market: it does not depend on the drift rate at all. Rank your job types once and the ranking holds.

The service repair sits at 0.01 and is not a real exposure at any drift rate this side of a crisis. A shop that puts an escalation clause on its service tickets has paid a real price for nothing.

There is a second reading in that table worth taking. The long-window work is the project and upgrade work, which is also the deferrable half of the book, so in a soft market your price exposure concentrates in exactly the jobs that are hardest to win. See related: Deferrable Versus Non-Deferrable Work and What a Downturn Touches.

The five instruments, ordered by what the customer has to accept

Sorted by how much of the deal the customer must accept as unsettled when they sign, least first. Two of the five score zero because the customer never sees them.

1. A supplier price hold. You ask your distributor to hold a quoted price on named line items for a stated number of days, in writing, against a quotation number. The customer never knows it happened. At a small shop's volume you will not get a hold on everything; you will often get one on a named project list from a rep who wants that project, and asking costs nothing.

2. Pre-purchasing at deposit. You take a deposit and buy the material the day the job is signed, which closes the window to zero. The customer sees a deposit, which is ordinary in this trade, and a price that stays fixed.

3. A shorter validity window. The price is still firm, but the customer's decision clock is shortened. This is the first instrument they feel, and against a competitor quoting a longer window it reads as less confidence unless you frame it.

4. A named allowance on one volatile item. The customer signs knowing one line is not final and will be trued up at documented cost. Narrow, legible, and it leaves the rest of the number alone.

5. An escalation clause. The customer signs knowing the contract price itself can move. It is the broadest instrument and the one that most needs a threshold, a cap, an objective trigger and a cancel right to read as fair rather than as a licence.

Validity windows, escalation wording and the deposit that locks material are derived in full in Quoting While Prices Are Moving. Do not write a clause from this card.

What the instruments cost you, which runs the other way

The two instruments the customer never feels are the two that cost you something real. A price hold spends supplier leverage you can only spend so often, which is why it works on the project you name and not on your whole quote book. Pre-purchasing spends cash and shelf space, and the risk is stranding: material bought for a job that never closes, or bought job-specific enough that it cannot go on the next one.

So the practical rule is not "pre-buy everything." It is: pre-buy only where the job is signed and the material is generic enough to be absorbed elsewhere if the job dies. Special-order, sized-to-site or customer-selected finishes fail that test and should be ordered on signature, not on optimism.

That inversion is why shops reach for the escalation clause first. It is free in cash and it costs the most in goodwill, which is precisely backwards from how it should be chosen.

When a step replaces the drift

Everything above assumes drift, a category creeping at a measurable monthly rate. A different thing happens when a duty, an allocation or a single supplier decision lands as a step: an announced surcharge with an effective date. Then the drift rate is useless, because the move is not a rate, it is a date and a number. The response is the open quote book rather than the pricing model, and the window you care about is the one before the effective date. See related: A Tariff Lands on Something You Install.

The tell that you are in a step rather than a drift is that the distributor names it, in a letter, with a date. Drift never gets announced.

The call to a customer whose price moved

This is the part that decides whether you keep the relationship, and the shape of the call is set long before it happens by whether you wrote anything down.

If you have an escalation clause with a documented trigger, the call is a notification: the material line came back at a documented figure, the clause names what that does to the total, here is the new number, here is the supplier quotation behind it, and here is your right to cancel. You are executing a term they agreed to, not asking for more money.

If you have nothing, then you are asking, and you should say so in those words rather than dressing it up as a policy. Bring the original quote and the current supplier quotation side by side, name the move as a percentage of the material line and as a percentage of the total, and give them a real choice: hold the price and accept a later install date once the market settles, split the difference, or cancel with the deposit returned less documented work. See related: Re-Quoting a Job Without Losing the Customer's Trust.

What loses customers is neither the increase nor the ask. It is the increase arriving on the final invoice with no call at all.

Checking that you sized it right

Four checks, and each one catches a different way this goes wrong.

• Measure the window from the purchase order, not from install. Shops that measure to the install date overstate the window badly on long projects and reach for instruments they do not need, because the price was locked at order and the remaining weeks carried no price risk at all.
• Use the spread, not the average. If the median window is 18 days and the slowest tenth run 40, the instrument decision belongs to the 40, because those are the jobs that get caught.
• Recompute after a job type changes. Bringing a subcontracted element in-house raises labour share and cuts material share, which lowers the exposure figure for that job type without anybody noticing they now have a cheaper problem.
• Check the instrument against the figure before you use it. In the shop above, an escalation clause on the service book protects 0.01 exposure figure and costs the goodwill of the customer who reads it. Instruments are chosen per job type, not per shop.

References

• U.S. Bureau of Labor Statistics, Producer Price Index, commodity series for construction materials, published monthly
• See related: Quoting While Prices Are Moving, Responding to a Supplier Price Increase, Building Price Increases Into Your Contracts
• See related: Deferrable Versus Non-Deferrable Work and What a Downturn Touches, Pricing Through Inflation Cycles, A Tariff Lands on Something You Install