• Shaun O

Skyrocketing material prices: how to protect your bottom line



Introduction

Construction materials are rising for wood, metal, plastics and more. Reliability of material costs has vanished leaving many in the industry wondering…...how do I protect my bottom line?


Price increases for materials is not uncommon but it’s typically once or twice a year that we hear about a modest increase. The past six months have been different. Costs are rising weekly and in some cases even more frequently. This makes estimating a project increasingly difficult and leave everyone in the industry vulnerable.


In this post, we look at why it’s happening and what you can do about it. Protecting your bottom line is critical to survive this period in time in construction.


Why are material costs skyrocketing?

According to the AGC (Associated General Contractors of America) “Materials cost increases and supply chain problems continue to proliferate. Reports from members this week have cited copper, vinyl siding, and “concrete, (driven by cement prices, due to COVID shutdowns), steel (metal studs, ductwork, light fixtures, heavy structural steel), gypsum, and lumber all increasing.”


Why? According to Chief Economist Ken Simonson "the short answer is the pandemic, and the supply chain is still being affected in a number of ways."


As reported by Vox, “When the pandemic hit in the spring of 2020, many people in the lumber industry assumed business was about to go sour. Millions of people were out of work, businesses across the country were shuttered, and the country was in a recession. And so, producers reacted accordingly."

“They really dialed back, thinking that demand would fall, and the reality is that demand never slowed,” said Dustin Jalbert, senior economist and lumber industry specialist at Fastmarkets RISI.

Instead, things sped up. People stuck at home because of Covid-19 shutdowns across the country decided it was a good time to take on home improvement projects repairing and remodeling their homes — they put up fences, added on decks, built out offices, refinished basements. The DIY trend helped drive stellar sales numbers at stores such as Home Depot and Lowe’s.

Many of those who weren’t busy fixing up their homes went looking for new ones. And where they couldn’t find preexisting homes, they started to build. Whatever initial slowdown there may have been in construction pretty quickly subsided. “Us being capitalist America, if people want to buy a house because they want to move out of the city and move to the suburbs, someone will build it for them. They’ll figure out a way,” said Michael Wisnefski, CEO of MaterialsXchange, an online marketplace for lumber and plywood.

In a report produced by AGC they stated:

“Beyond the pandemic and the freeze in Texas, numerous unique events have added to the price increases or delivery delays for specific categories of products. An earthquake and a fire at a factory in Japan curtailed supplies of semiconductor chips for the automotive industry. As semiconductor makers dedicate more available capacity to that sector, they are delivering fewer chips needed for construction trucks, offroad equipment, and “smart” tools and communications devices. An unplanned cement plant shutdown in Texas has reportedly led to rerouting cement produced in Colorado to Texas instead of states in the Mountain West, potentially forcing reductions in concrete product deliveries during prime construction season. Even the six-day blockage of the Suez Canal disrupted products coming from Europe and Asia to the United States.”

When will prices stabilize or drop again?

It’s hard to predict when demand may slow and supply will catch up. As most of us hope for a quick stabilization, many experts are warning this will continue for the reminder of 2021 and possibly beyond. There is pressure to eliminate tariffs on lumber and other materials to help but that is yet to happen as of the writing of this post.


What can be done to protect your bottom line?

As the co-owner of a construction company, I received a change order request yesterday from an electrical subcontractor for $11,000 out of the blue! This was 100% related to material price increases. I have a fixed bid with my customer and what can I do to protect myself and my sub from these increases?


First, giving customers early warning of potential price increases is essential. Let them know that the price is as of the date of the proposal and that any price increases will need to be added. This language should be added to the proposal and to the contract. If you share both price increases and decreases with the customer, it becomes much more fair. Customers may not appreciate the increase but if you provide the backup information, they will understand. This is much better than surprising them with an increase like I was presented with.


Work with your suppliers and subcontractors to keep you updated on price increases…..before they happen. If your bidding/approval process is longer than 30 days, ask subcontractors for an alternate add price for anticipated price increases. This way, your proposal can include this from the beginning.


Once you are awarded a project, buy out your materials and subcontractors ASAP. This helps everyone lock in prices and place those orders. The longer you wait, the more chance for a surprise increase.


Protect your materials from theft. On one of my projects, we salvaged some lumber during demolition. It was piled outside the job waiting for nails to be pulled. Within two days, the pile was stolen. People are that desperate for wood….they are stealing demolition materials! Safeguard your materials in a good storage container or in a secure location.


Summary

Price increases are going to be a challenge for the near future but it will stabilize at some point. Until then, use great communication with your customer, suppliers and subcontractors to address it in an open and honest manner. Take proactive steps to reduce the risk of having to absorb these costs hurting your bottom line.


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