Having recently sold a new construction home in Destin, Florida, I was not surprised to review the builder contract and find an “Escalation Clause for Specified Building Materials”. My buyer client had not read the contract carefully, and as we sat with the builder to finalize the sale, I brought it up.
What is this new construction cost escalation clause, and why is it used?
Building construction material costs have been rising for more than a year, since the beginning of the COVID pandemic. Lumber and steel production declined and housing demand increased. Home remodeling projects skyrocketed from people working from home. These factors, as well as tariffs on imports and labor costs, caused the price of lumber and other construction materials to rapidly increase.
Building materials prices have increased 22.5% year-over-year.
Steel products costs are up 59% in 2021
Softwood lumber prices are up 81%
The cost of a new home has increased on average by $30,000 due to the price of lumber alone.
Since construction materials prices are considered “volatile”, builders are adding clauses to their contracts to cover unexpected price increases during construction. This is called the “Escalation Clause for Specified Building Materials”, or a version thereof. So, instead of being locked into the contract price for a new home, and stuck with the extra and unknown materials cost increase, the risk is being passed along to the buyer, or partially shared by the builder. It’s being used in about 47% of new construction contracts.
In the case of my recent Destin new construction sale, the buyer would be obligated to pay up to 4% more for construction materials, should their cost increase by more than 6%. The initial cost increase of 6% would be paid by the builder. If the cost of the materials went up more than 10%, the buyer could pay the overage or terminate the contract. He would, however, lose his deposit. (Why? Because the builder will have already incurred costs in construction on buyer’s behalf, including and considering the builder’s time, design fees, permitting, lot preparation, paying subcontractors, and more.)
Variations to the Escalation Clause for Specified Building Materials include using a percentage increase of the overall base price of the home as a benchmark, or, as mentioned, using specified building materials cost increases. These extra fees may be paid at the time of the materials purchase or when the home is complete, and the sale closes.
You should read your new construction contract carefully to find out if you will be responsible for paying materials cost increases, at what limit, what happens if the limit is exceeded, and when payment will be due.
It’s Wendy… It’s Sold!
Wendy Rulnick, Broker, Rulnick Realty, Inc.
Email Wendy: [email protected]
Wendy Rulnick, Broker, lists and sells real estate in Destin, Santa Rosa Beach, 30A, Miramar Beach, Crestview, Sandestin, Seaside, Rosemary Beach, Okaloosa Island, Fort Walton Beach, Niceville, Freeport, Bluewater Bay, Navarre, Florida.