Material pricing: quotes, waste, escalation and taxes

Materials are often the largest single cost in the work a contractor performs itself. Unlike labor, material prices can usually be fixed before the bid, through supplier quotations. But a quotation is only the start: the estimator must convert net quantities to purchase quantities, allow for waste, add delivery and handling, account for price changes between bid and purchase, and include the sales taxes that are a real cost to the contractor. This lesson works through each step.

Getting prices

Material prices come from several sources, each suited to a different stage and size of purchase.

• Supplier quotations: written prices from suppliers for the specific materials, quantities and delivery terms of the project. These are the basis of bid prices for significant materials.
• Price lists and recent invoices: suitable for small, common items such as fasteners and lumber, adjusted for current market conditions.
• Published cost data: useful for unfamiliar items and for checking quotations.
• Historical unit costs: used in early estimates but rarely for bids, because material prices move quickly.

A good quotation request gives suppliers the specification sections, drawings or a bill of materials, the required delivery schedule and location, and the date by which prices must be received. It asks suppliers to state what is included and excluded, how long the price is valid, payment terms and any escalation clauses. Requesting quotes from at least two or three suppliers for each major material gives a check on price and protects against a supplier withdrawing.

Reading and comparing quotations

Quotations rarely arrive on a common basis. One supplier quotes delivered to site, another free on board (FOB) at its plant; one includes accessories, another quotes them separately; one covers the full quantity, another only the items it stocks. Before choosing a supplier, the estimator levels the quotes: adjusts each to the same scope, quantity, delivery and terms so that they can be compared fairly. Bid-day leveling of material and subcontractor quotes is one of the estimator's most important tasks.

From net quantity to purchase quantity

Takeoff measures the work net, as it appears in place. Materials are bought in standard units and sizes, and some material is always lost to cutting, breakage, spillage, overlap and theft. The purchase quantity therefore differs from the net quantity in three ways.

• Waste and loss: a percentage added for cutting, breakage, spillage and theft. Typical starting values are 2 to 5 % for concrete, 3 to 5 % for masonry units, 5 to 10 % for lumber and sheathing, 10 to 15 % for gypsum board and 5 to 10 % for flooring, adjusted for the design. Cut-up layouts and patterned materials waste more.
• Laps and overlaps: material that overlaps itself in place, such as reinforcing bar laps, membrane and vapor retarder laps, and roofing overlaps, added from the specification or standard details.
• Packaging and rounding: materials sold in whole units, such as sheets, boxes, bundles, pallets or ready-mix truckloads, rounded up to the next purchase unit.

Waste allowances should come from the firm's records, not from habit. An allowance that is too high makes the bid uncompetitive; one that is too low guarantees a shortfall. When records show actual waste much higher than estimated, the cause is often poor material handling on site, which is a management problem, not an estimating one.

Delivery, handling and small-order charges

The price of material at the supplier's door is not its cost in place. Estimators add the costs of getting it to the work.

• Freight: delivery charges, minimum load charges and fuel surcharges. Ready-mix concrete suppliers charge for short loads below a minimum, for waiting time beyond an allowance, and for winter additives or heated water.
• Hoisting and distribution: crane or forklift time, material hoists, and labor to move material to the floor where it will be used.
• Storage and protection: laydown areas, containers, tarps and heated storage for temperature-sensitive materials.
• Restocking and returns: charges for returning surplus material, which can make over-ordering expensive.

Taxes on materials

Sales taxes on materials are a real cost in many jurisdictions, and getting them wrong is a common and expensive mistake. Whether a tax is a cost to the contractor depends on how the jurisdiction treats construction contracts and whether the tax can be recovered.

In the United States, there is no national sales tax, and each state, and often each county and city, sets its own sales and use tax rates and rules for construction. In many states, a contractor performing a lump-sum contract to improve real property is treated as the consumer of the materials it installs, so it pays sales tax when it buys them, or use tax if it buys them out of state without paying the local tax, and that tax is a cost to include in the bid. Other states treat contractors as retailers who charge tax to the owner, or tax the whole contract price. Exemptions for purchases by tax-exempt owners such as governments and charities vary: in some states the contractor can buy tax-free on the owner's behalf, in others it cannot. The estimator checks the rules of the state and locality where the project is built.

Escalation and price risk

Material prices change between the bid and the purchase, sometimes sharply. Steel, copper, lumber, fuel-dependent products and anything subject to tariffs or supply disruptions can move by double-digit percentages in a few months. A supplier's quote is usually firm for 30 to 90 days; if the contractor will not buy until later, it carries the risk of price increases unless the contract provides relief.

Here r is the expected escalation rate per period and n is the number of periods until purchase. Estimators forecast r from producer price indexes, supplier advice and market commentary, and they apply escalation to the expected purchase date of each major material, not to the whole estimate at once.

Contractors manage material price risk in several ways: placing purchase orders soon after award to lock in prices, buying and storing critical materials early, asking for longer price holds, including escalation allowances, and negotiating price adjustment clauses that share the risk of large changes in identified materials with the owner. Owners increasingly accept such clauses for volatile materials, because the alternative is bids padded with large contingencies.

Owner-supplied materials and allowances

Some materials are not priced by the contractor at all. Owner-furnished items, such as equipment the owner buys directly, may need only installation pricing, plus receiving, storage and handling. Cash allowances, written into the specifications as a stated sum for items not yet selected, such as hardware or finishes, are carried in the bid at the stated amount, with installation and markup priced according to the contract. The estimator must read the allowance clause carefully: in some contracts the allowance covers material only, in others material and installation, and in Canadian standard contracts such as CCDC 2 the treatment of overhead and profit on allowances is specified in the contract documents.