Building Materials are Getting Pricey: Investar USA Discusses Strategies for Managing Rising Costs

The price of standard building materials has been steadily rising over the past few years. How can developers achieve the goal of producing affordable housing when they bear the brunt of escalating costs? Investar USA offers three tips for successfully mitigate the risks associated with skyrocketing project costs. Investar USA is a respected real estate development firm specializing in multifamily development.

The cost of construction materials has been escalating at an alarming pace, and real estate developers must develop flexible strategies to manage the significant financial risks. Here are a few solutions that may help investors manage rising prices.

Pricing Ceilings

While most projects are structured on a lump-sum pricing basis, this strategy shifts the risks from contractors and sub-contractors to the project owners. When renovation or repositioning projects escalate in scope, it’s the investors who must bear the brunt of any subsequent cost overruns. By creating a maximum price ceiling, investors simultaneously give themselves flexibility within the project while ensuring protection for the project owner. According to the guaranteed maximum price contract, the contractor may receive compensation for the costs and fees up to a certain point, after which the contractor is liable. Moreover, funds are returned to the project owner if the initial costs were overestimated.

Cost Escalation Provisions

Because the costs of materials are constantly fluctuating, investors are well-advised to include escalation clauses in project contracts, particularly for specific materials that are more likely to experience sudden price spikes. There may also be delay escalation provisions to protect project owners from price increases during project delays. When a project is halted through no fault of the contractor, the contractor agrees to honor the price of materials throughout a certain delay timeframe, after which the project owner is responsible for the current cost of materials. only during the length of time specified in the contract. Once that period of time has elapsed, the owner is only responsible for the cost of the materials at the

Shared Overrun Risk.

Project owners can reduce the risk of escalating materials costs through Integrated Project Delivery. This strategy divides savings among the parties if the final cost is lower than the Target Cost that was established when the project was originally designed. The Integrated Project strategy also allows the parties to decide how to share cost overruns if the final cost exceeds the target cost.
Determining what the shared risk will be between the project owner and the contractors is critical to managing costs successfully. With the price of materials showing no signs of lowering, real estate investors must have a comprehensive understanding of the scope of the project and the potential for volatility.

Investar USA a leading North American residential and commercial property developer, specializing in renovating and repositioning diverse properties throughout the U.S. and Canada.