Protecting your Margin Against Fast-Rising Material Prices

Inflation has been hitting the construction industry hard. From June 2025 to June 2026, the overall cost of construction materials rose 9.6%, according to Associated Builders and Contractors—slightly higher for nonresidential projects. It’s the fastest increase in material costs since the COVID 19-related supply chain disruptions in 2020.

High fuel costs contributed to that increase, but ABC Chief Economist Anirban Basu noted “…the greater concern is the continuing price growth in tariff-affected inputs like iron, steel and copper.”

Across the country, contractors have felt the pinch: 43% of respondents to the 2025 ASG National Workforce Survey said they’ve had projects canceled, postponed or scaled back due to increasing costs; one out of six identified tariffs as the specific reason.

It raises an important business question: What are you doing to protect your margins in an environment of tariff uncertainty and fast-rising prices?

ASG asked that question in its survey, allowing multiple responses (so totals can exceed 100%):

• 41% increased their bids.

• 39% accelerated purchases to get ahead of the next round of hikes.

• 16% absorbed the cost or split it with their suppliers.

• 23% added price-sharing or escalation terms to their contracts.

That last number is the one worth noting. A properly written material escalation clause is the only item on the list that protects your expected profit margins in that time between signing a contract and completing the work. And yet, more than three out of four survey respondents failed to mention it.

Ayala Law, a Florida law firm with expertise in real estate and construction, defines a material escalation clause as “a contract provision that allows for adjustments to the contract price if the cost of certain materials increases significantly after the contract is signed.”

Or as the blog for Projul construction management software puts it, “It’s a risk-sharing mechanism written into the contract before work begins. Without one, you carry 100% of the risk on material prices. If lumber goes up 15% three months after you signed a fixed-price contract, that comes straight out of your pocket. … With an escalation clause, you and the owner agree upfront how to handle that scenario.”

The nuance is that such agreements need to be specific to hold up under pressure. Simply including some language in a contract is not the same as having an agreement that protects against disputes when price hikes actually occur.

Any escalation clause is a matter of negotiation, so there is no single template to plug into your contracts. But an effective clause is specific about these five things:

• What materials it covers.

• A baseline price for each material at the outset of the contract.

• How price changes get measured.

• What triggers a claim.

• How much adjustment is allowed.

Here’s how those components of the material escalation clause should be structured:

Materials covered: A clause that references “all materials” will be almost impossible to administer, and invites disputes about scope. The categories that carry real exposure on your projects should be listed specifically—things like structural steel, copper wire, aluminum framing, switch gear or whatever the relevant line items are for your work.

Tracking prices: There are a number of resources for tracking prices. The most comprehensive and reliable over time is probably the Producer Price Index series published by the U.S. Bureau of Labor Statistics. Steer away from broad indices that aren’t specific to construction inputs; you may find that they aren’t updated frequently enough or that they don’t get specific enough to cover the subcategories that exist under broad lines of commodities like steel or electrical. It’s not unheard of to simply allow supplier quotes as a tracking mechanism—but be sure you can count on those suppliers for consistency and reliability in their own pricing practices.

Baseline prices: Define the cost for each commodity for the date the contract is signed. Without a baseline, there is no starting point for calculating a change in price. A best practice is to use the same index (or suppliers) that will be used to track price changes.

Trigger and cap: A common structure is a trigger point for the escalation clause to take effect, and a cap on the maximum adjustment. For example, a common structure is a trigger of 5% and a cap of 15%—meaning that price increases of less than 5% are absorbed under the contract, and the cost adjustments can’t exceed 15%. As with every part of an escalation clause, the specific trigger and cap are negotiated.

Bonus language: Some clauses are designed to work in both directions, by including language that if material costs drop below the baseline, some of the savings go back to the owner. If your own sourcing practices allow for this, such language makes it easier to present a material escalation clause as a cost-sharing and risk management device for both parties.

Why It’s Timely Right Now

The immediate driver of construction material cost increases is tariff volatility that isn’t resolving, according to ABC Carolinas. Regional contractor associations have reported projects rebid or scaled back after material quotes came in 10 to 15% over budget—not because anyone priced the work carelessly, but because the gap between bid day and mobilization now carries real price risk.

This is the operating environment for at least the near term. Contractors who don’t build a structural response into their contract templates will absorb the next spike too.

Practical Next Steps

The most immediate step is auditing your existing contract templates against the checklist above. If your escalation language doesn’t include a specific index, a documented baseline, a defined trigger and a cap, it might not survive the conversation you’d need to have if a price spike actually hits.

The second step is to start tracking the relevant PPI series for your key materials now, even before a clause requires it. If escalation is triggered on a future project, having a historical baseline documented in your files is better than trying to reconstruct it after the fact.

The third step is legal review. Escalation language borrowed from a template or another firm’s contract is a liability without review against your state’s contract-modification and notice rules. The specifics vary by jurisdiction, and what works in one state may not be enforceable in another.

Best Supply offers competitive pricing and takeoff assistance so you’ll know which materials present the greatest price risk, and you don’t buy more than you need. See how we can help with your next project.