Shared
Price Clause and Escalation Clause in New Home Construction Contracts: Watch Out!
Due to the COVID 19
pandemic, lumber mills were forced to close or slow production but the
builders’ demand for lumber did not decrease. As a result, the lumber
prices have spiked. Prices rose by more than 250% in the last year, according
to Business Insider.
The price and
availability of building materials have been cited as one of the top challenges
faced by homebuilders.
According to the National Association of Homebuilders, the increases added
more than $24,000 to the price of the average single-family home.
To help protect
themselves from ongoing price increases in the lumber market, more builders are
adding escalation and shared price clauses to their sales or construction
contracts.
Simply put,
an escalation clause is a provision in a contract that calls for
adjustments in fees, wages, or other payments to account for fluctuations in
the costs of raw materials or labor. This clause shifts the ENTIRE
burdens for increasing materials and labor costs from the contractor to the
client. According to the April 2021, National Association of Home
Builders and Wells Fargo Housing Market Index survey, 47% of builders said they
were including price escalation clauses in their contracts.
According to the same
above-mentioned study, another alternative used by 10% of the builders, is to
include a shared price clause in their contracts. In this type of clauses, the
builder agrees to absorb PART of the material price increase, with the home
buyer covering the rest.
Lastly, some builders
reported pre-ordering lumber, obtaining lumber price guarantees from suppliers,
and/or pausing before starting to frame the structure. Among builders who have
been successful in locking in lumber prices by obtaining price guarantees from
suppliers, 42% reported that the prices were only guaranteed for 15 to
29 days.
It is stating the obvious that, while these shared price and
price escalation clauses may help to protect builders from rising costs,
customers unable to afford the escalated house prices will result in lost
sales.
Therefore, if you are about to sign a contract to purchase a
newly built home, make sure to read and ask questions about these clauses and how
much it may cost you if either a shared price clause or an escalation clause was to apply.
Hope this helps. Should you need assistance to buy a home in a new development
feel free to contact me.
Sources:
https://bit.ly/34zpDiY
https://bit.ly/3fB2D9y