Procurement Timing and Variability
Construction projects are frequently priced and contracted before major materials have been purchased, which exposes contractors to price volatility (Maniar, 2017). If this risk is not carefully managed, unexpected increases in material costs can quickly erode project margins. This case study examines recent market data, explains its significance, and outlines common strategies firms use to manage this exposure.
Data from the Producer Price Index (PPI) (2026) shows that the period from 2020 to 2017 experienced elevated inflationary growth, including a 22% increase from 2017 to 2021 and a 13% increase from 2017 to 2023; since then, prices have stabilized, but at these higher levels. Across PPI’s (2026) five-year sample, there were 11 months in which price growth exceeded 2%, with seven of those occurring in 2021 during the height of pandemic-related supply disruptions. Notable monthly spikes included +4.57% (March 2021), +5.46% (April 2021), and +4.83% (May 2021). By contrast, their average month-over-month increase during the sample period was +0.56%, indicating that while most months experience relatively modest growth, material costs can escalate rapidly within short timeframes.
Materials often represent 40–45% of total project costs (Maniar, 2017), meaning even minor price increases can significantly affect profitability. Because bids are typically based on prevailing material prices at the time of estimation, contractors remain exposed to upward cost movements that occur between contract award and actual procurement (Maniar, 2017). If prices rise during this period, contractors may be required to absorb the difference, potentially compressing or eliminating expected margins (Maniar, 2017).
Additionally, periods of price volatility are associated with concerns over commodity availability and scarcity, which construction firms identify as significant operational challenges (Maniar, 2017). As a result, price volatility not only affects material line items directly but can also produce secondary cost impacts across the project lifecycle.
Contractors often establish supply agreements rather than purchasing materials incrementally (Maniar, 2017). Approximately 60% of firms choose long-term pricing mechanisms tied to market benchmarks, while roughly 25% negotiate fixed pricing for a defined period (Maniar, 2017). Another contracting structure involves collar price agreements, which are used by a minority of surveyed firms as a mechanism for possibly managing commodity price risk (Maniar, 2017).
Although these arrangements differ in structure, they share a common objective of limiting commodity risk exposure and protecting project cost and profit targets (Maniar, 2017). Some firms mitigate exposure by using financial instruments such as futures contracts to lock in material prices in advance (Maniar, 2017). In effect, this functions similarly to insurance against price increases. Contractors may also utilize forward contracts, which allow two parties to agree today on a future transaction price (Dhir, 2025).
While these strategies reduce downside risk, they can also result in opportunity costs if market prices decline after the contract is secured (Maniar, 2017). In certain cases, contractors allocate part of the risk to owners through escalation clauses embedded in bid agreements (Maniar, 2017). These provisions allow for full or partial pass-through of commodity price increases to the owner through escalation clauses (Maniar, 2017).
Rather than relying on a single vendor, firms often diversify their supplier base (Maniar, 2017). This approach reduces dependency risk, improves supply flexibility, and can strengthen negotiating leverage during periods of constrained availability.
Research suggests there is no universally standardized method for forecasting material prices in construction projects (Maniar, 2017). This variability underscores the importance of tailored forecasting tools, custom dashboards, and scenario analysis during the bidding phase to better anticipate market fluctuations and incorporate risk adjustments into pricing decisions.
Material price volatility represents a persistent and significant challenge within the construction industry. Although most months reflect relatively moderate price movements, historical data from the PPI index (2026) demonstrates that short-term spikes, such as those observed in 2021, can occur quickly and at magnitudes sufficient to materially affect project economics.
Because materials comprise a substantial share of total project costs, even modest percentage increases can compress margins when contracts are executed in advance and procurement is delayed (Maniar, 2017).
To manage this exposure, firms rely on a combination of long-term supplier agreements, financial hedging instruments, escalation clauses, supplier diversification, and improved forecasting at the bid stage (Maniar, 2017). While none of these strategies fully eliminate uncertainty, they are designed to enhance predictability, moderate volatility, and better safeguard project profitability.
References
U.S. Bureau of Labor Statistics. (2026). Producer Price Index by Commodity: Special Indexes: Construction Materials [WPUSI012011]. Federal Reserve Bank of St. Louis (FRED).
Maniar, H. (2017). Scenario of commodity risk management practices used by Indian construction companies. The Journal of Modern Project Management.
Dhir, R. (2025, August 9). Forward contract: How to use it, risks, and example. Investopedia. https://www.investopedia.com/terms/f/forwardcontract.asp
