How to Protect Against Steel Price Increases

IT IS NEVER NICE to take advantage of someone else’s misery, but the current horrendous problem of the steel industry in not being able to obtain reasonably price materials is a very good example of a worst-case scenario that could happen to any contractor.

Global market forces are driving steel prices upward in unprecedented fashion. The price of steel is said to have caused overall building materials to escalate in price 100% in Pakistan and led to rampant steel hoarding in South Korea. Most steel is now produced in the Far East, and U.S. contractors are helpless to affect it.

This sounds strikingly similar to the dimension lumber scarcity of a few years back — multiplied by 100.

The basic problem is not unusual. Our free-market economy is built on a supply-and demand-system, and when those two elements get out of balance, one side or the other suffers.

The obvious way to protect yourself, if you are a buyer, is to get “locked in” price quotes that stay in effect for as long as your need to be able to rely on them. If you are the seller, the equally obvious solution is to limit your price quotes or insert qualifying words that protect you in the event of a price increase from your supplier. As a lawyer, it is easy for me to solve that problem for a client with just a few keystrokes.

But what can I — or you — do with an industry-wide, worldwide, bona fide crisis? One in which the price of a product is going up 10% to 50%, where in one year the price of rebar jumped from $283/ton to $412, and the price of hot-rolled coil steel used for ductwork went from $345/ton to $432 and then in the next month to $482? One in which suppliers write to their customers demanding surcharges and, if they can’t get them, they file for bankruptcy?

There is no silver bullet here, but prudent contractors can do some things to lower their exposure to financial ruin:

• Match time periods for how long your bid must remain open with how long the price quote on which you rely is valid. While many contractors routinely do this, they frequently do not go the next step, which is to go back and reconfirm a price when asked to keep a bid open longer, such as in a bid protest situation.
• Put a “hold” on material verified to be in stock. One effect of the current steel crisis has been the long lead times on steel products. The more you can verify that the goods you needs are in stock, the better the chance that they will be available when you need them.
• Make purchases early and take title to the goods. Not only does this affect the price, but it also protects you in the event of a bankruptcy. A down payment may not be recoverable, but specifically identified, segregated goods that are yours are not likely to become part of the bankruptcy receiver’s property. Putting them in a bonded warehouse if you can’t take possession right away improves your position even more.
• Negotiate for release of funds to you to make early purchases. It is not unusual to provide for release of funds by a customer for long lead-time items. There is no reason not to do the same for price-vulnerable products. If an owner is aware that by allowing you to purchase such materials it can avoid a hefty price increase, or worse yet, no product at all, there is a very good chance that you will not only get the funds released to buy the goods, but score points with the customer for being proactive.
• Require surety bonds/corporate guarantees. It is, admittedly, unusual to require a bond from a supplier, but these are unusual times. A bond limited to the contract amount will only get you money — not the product you need, when you need it — but it will at least defray the loss to you, and since most surety bonds (particularly these days) are personally indemnified by the owners of the business obtaining the bond, you become the first guy to get your product and not the last.
• Define unavailability of materials as a “force majeure” in your agreement. Some contracts actually include unavailability of materials as an excusable delay, but then they really have to be unavailable and not just a lot more expensive. This would not get you paid for the increased cost, nor would it allow you to recover for expenses already incurred or other unavoidable costs such as cancellation or restocking fees, but it would be a way to cut your losses.
• Negotiate escape clauses into contracts. You could do this in a number of different ways: One would be to say that if you can show that the market price of an item for which you had a quote has gone up more than X% despite your good-faith efforts to find it, you will be able to pass the increase on. Another way would be a clause that gives you the right to terminate without fault.

I wish I could tell you that by using these suggestions you could avoid such problems altogether, but even if I did, you would be wise not to believe me. Material availability and pricing have always been a risk, along with many other risks all contractors run daily.

But with the risk taking on such huge dimensions, to the point of putting contractors out of business, it is now worth the extra time to take proactive steps to reduce your exposure.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to [email protected].