Best Practices for Dealing with Price Volatility in Utah Commercial Construction

• Main Author: Weidman, Justin Earl
• Format: Others
• Published: BYU ScholarsArchive 2010
• Subjects: Justin Weidman; construction; price; volatility; fluctuation; Construction Engineering and Management
• Online Access: https://scholarsarchive.byu.edu/etd/2324; https://scholarsarchive.byu.edu/cgi/viewcontent.cgi?article=3323&context=etd

In the commercial construction industry, the problem of price volatility as it pertains to materials and labor is a consistent problem. The changing instability of market conditions presents a challenge for construction companies to accurately estimate and complete projects within budget. This volatility can lead to higher costs and more risk to suppliers, contractors, and owners which can cause financial distress for all parties involved in the construction process. As lump sum contracts are typically being used on many projects, the owners seem to have the upper hand and are forcing contractors to honor lump sum contracts even when prices increase significantly. Owners are also using their position to reap the benefits of price decreases by basing future work relationships with the contractor as an incentive to pass on any savings of price decreases. Volatility in construction will continue to be a risk that participants in the construction industry in Utah will face. Commercial construction projects will continue to be built as the population increases and as more buildings are needed to service other industries. Price volatility can be economically dangerous when price changes affect the assumptions on which the contract is based. While there is no proven method to remove the risk of price volatility, methods have been developed to control the risk participants are exposed to in various contracting methods. Contractors, owners, and suppliers need to coordinate with each other and use best practices that will distribute the risk to the party that has the capability to handle the risk.