Fixed bid with an escalation clause, or an allowance line that gets trued up

Question

I've been sitting in on scope walks with two different crews this spring and they price materials risk in opposite directions, which makes it hard for me to tell what normal even looks like.

Crew A gives one fixed number for the whole job and refuses to break out materials. Their position is that the investor is buying certainty and the premium is baked in. When lumber ran up on them last year they ate it on two jobs and made it back on the next four.

Crew B writes a fixed labor number and puts materials in as an allowance with receipts, plus a clause that anything moving more than 8 percent between bid date and purchase date gets passed through at cost. Their argument is that with tariffs on steel and lumber sitting where they are, a 90 day fixed bid on materials is a bet, and a crew that keeps losing that bet stops being a crew.

The investor side of this isn't obvious either. Certainty is worth real money when you're underwriting a flip and your hard money clock is running. But if the premium for certainty is 9 or 10 percent on a $70k rehab you're paying $6,500 for insurance against a move that may not happen.

I don't know which one I'd rather be on either side of the table. Curious where the room lands.

marcus_hale41 · Answer

plumb, the part I'd push on is the true-up mechanics, because that's where allowance deals go bad and it has nothing to do with tariffs.

An 8 percent escalation clause reads clean until you ask which index, measured from what date, on which line items. I've read allowance language that let the GC pass through a price move on "materials" without saying whether that meant the framing package only or every SKU including the finish tile the owner picked late. If the clause doesn't name the commodity and the reference date, you've written a blank check with a percentage sign on it.

The other thing the fixed bid crowd underrates is that certainty from a crew who can't absorb the hit isn't certainty. If a small outfit fixed-bids $70k, materials run against them by $9k, and they don't have the balance sheet, you don't get your fixed price. You get a change order fight or a walk-off in week seven, and the walk-off costs you more than the escalation would have. So the fixed bid is really a credit question about the contractor, and most investors never look at it that way.

I'd take the allowance with a named index, a purchase-by date, and receipts I can see. I'd also want the big-ticket materials bought and stored early where site conditions allow, which converts price risk into storage and damage risk. That trade I can price.

Fixed bid with an escalation clause, or an allowance line that gets trued up

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