The results of a survey asking about the effects of the current crisis in the cost and availability of building material paints a grim picture of just how deeply the crisis has cut into profits, company growth and the ability to complete jobs on time and on budget. At a time when things are opening up post-COVID and demand for construction and remodeling services is through the roof, the cramp on JLC-community businesses is severe, with nearly 70% reporting work lost or delayed by exorbitant material costs or lack of material availability. The only silver lining seems to be that some of this work will come back, as many contractors are simply advising customers to wait it out if they can. There is no lack of work, as there are many more prospects lining up, but not all are either willing or able to pay current prices.
A total of 261 respondents completed the survey over a 10-day period mid-May, 2021. Here's a look at their responses to each question:
1. What building materials and components are the most problematic for you in terms of price volatility or availability/wait times? This one is pretty obvious to most readers. Lumber stood out the most as a source of pain on the price front, with more than 73% naming lumber, called out as rough lumber, sawn lumber, softwood framing stock, dimensional or 2x material.
Sheathing, both plywood and OSB, was called out specifically by 63% of respondents. And treated, or PT wood, named by 42%.
Windows and doors stood out as the items described in a number of ways as having the longest lead times; the wait seems to have changed from about 2-3 weeks to 8 to as much as 17 weeks. Lighting, electrical and plumbing fixtures, cabinets, and appliances were the items that follow sash goods for long lead times.
But these were not the only items mentioned, by any means. As one respondent worded it: "Frickin everything!" Indeed, other materials mentioned include: moldings, cedar shingles, copper wire, switch boxes, conduit, steel, metal roofing, drywall, drywall compound, concrete, siding decking, composite decking, plastics, PVC pipe, trusses, I-joists, LVL, HVAC equipment, and hot water heaters.
Other products specified for which the wait times have been lengthened included garage doors, polyiso insulation, security hardware, and tile.
Frustration about the high pricing was evident in many of the responses, as some lashed out to express feelings that manufacturers and distributors are taking advantage of the situation. Others expressed exasperation at "the greed," and more than one respondent suggested that "a boycott" against big lumber companies and retailers should be organized.
On the other hand, many of our own seem to have added to the problem, having hoarded materials over the past fall and winter. Such a response, especially from large builders who have the capital to secure large stock piles of materials, especially plywood, is not necessarily easing their own pain (they are still not able to secure all the goods they need) and is compounding the problem for others.
A number of respondents also explored out loud their interest in pursuing other construction paths, looking into different paneling products such as Densglas and Secureock as alternatives to OSB and plywood, and exploring concrete and ICF construction as alternatives to framing with wood.
2. Have you adjusted the time period for guaranteeing a quoted price to clients? How has that time period changed in recent times? The response here seems to break out into three distinct responses. The largest sector (34%) has moved to no price guarantee on materials whatsoever with a majority of these offering labor-only bids. Several have specified letting customers purchase all materials. Of those controlling material purchases, transparency seems to be a recurring word, as they must be able to communicate to prospects about what they can and can't control and are sharing material estimates with prospects closely. It's unclear with some whether they are sharing the markups on material or joining the 7% of respondents who offer cost-plus or T&M service already. A few respondents were clear that they markup the initial material bid but pass through the increase with no markup.
Another sector (29%) have reduced the time they will honor the bid, often to a very short window of time. For most, this windows is from 5 days to 2 weeks. Here the existing relationship with the client matters a lot. There is a strong sentiment among those working with clients they know well of good understanding and lots of open communication.
If it's new clients being sold, the effect of a very small window for a guaranteed price can come off as pressure sales, however inadvertent that may be. A handful are clear that the quoted price stands, but is updated at the time of signing and at this time they will either add to, or subtract from (unlikely) to the bid, and, if the new price is unacceptable, let clients off (return the deposit).
A third group (21%) fall into the category of not adjusting the time period they honor the quoted price, or reducing it to around 30 days, but then lean hard on the escalation clause in their contract. This approach seems the riskiest. Many respondents wrote how they are having much more in-depth discussions about the escalation clauses at the time of signing, and even sharing data on rising costs with prospects at this time to illustrate the likelihood that prices will rise by the time they need to be purchased. Some of these conversations are leading to a renegotiation of the quoted price at the time of signing the contract, which has got to require a lot of finesse, or at least incredibly clear explanations to avoid prospects from bolting.
3. Do you include an escalation clause, or shared cost clause, in your contract? And if so, have you changed how you address this with clients recently to avoid discord? In part, this one got answered by the cohort of respondents to the question above. Here, 39% of respondents specified having an escalation clause in their contract. This includes those working cost-plus or time-and-materials, which name the owner as the party responsible for the cost of materials, and most of these specified that they now amend any "not to exceed" language around materials.
Only two respondents specified that their contracts worded the price escalation as a shared cost with owners. Shared cost is sometimes viewed as a more competitive alternative for builders to attract buyers, but it is risky unless offset by a higher markup. It is more common as a part of subcontractor agreements.
4. Do you have any tips for setting expectations with clients around price changes, or around the availability or wait times for materials? If there was one resounding note here it was "be transparent with clients." Transparency here is taken as a very specific and deliberate disclosure of the bid to customers.
Transparency is closely related to the less formal, but equally often cited recommendation to "be straightforward," be "honest and direct" and "clearly state what's happening." Many urge that it is not possible to "over communicate" with customers about changes in price or availability. Here are some of the specific ways that was expressed:
"Start the conversation as early as possible with the clients, and keep reminding, like every week." "Start discussions about pricing on the first meeting."
"We have started communicating more about how things are fluctuating and for them to expect it to continue for some time. We have been using phrases like, 'under normal circumstances a project like this would take x number weeks, but with recent delays and extended lead times we have seen projects taking x weeks longer.'"
This sort of communication doesn't have to be heavy. As one respondent shared, conversations with clients include "lots of jokes around about rich people flaunting wealth by driving their truck around with plywood in the back."
Another common theme is to "buy early," with a number of respondents saying that as soon as the contract is signed they will begin procurement, and explain to customers they will not start the job until all materials have been procured. Payment schedules are altered to allow for this procurement to occur early and with full disclosure to customers. This can even happen on large jobs, as one respondent explains: "We are purchasing storage containers and placing them on our sites and ordering materials way in advance of when we need them. This way we create an on-site warehouse/inventory of everything from lumber to plumbing fixtures, appliances and down to tile and hardware."
Other advice offered includes:
"Mark up 25% instead of 15% to cover fluctuations in material cost." "Pass on work where clients do not adjust expectations."
5. How are your subcontractors handling price increases and availability concerns? Has this been a source of discord with subs? Are the controls and communications you have with subs working? Overall, there seems to be more understanding than discord, though about 17% of respondents observed "a strain on our entire network of subs," or something expressed of similar effect.
Most respondents voice the understanding that their subcontractors are in the same boat as they are as a general contractor. "No discord. Just frustrations but those are not towards each other. Only towards the suppliers."
There is a strong echo of the tone of the previous question, with an emphasis of "communication" and "over communication" being the key to keeping relationships with trade partners open and easy.
There is a hint of concern leaking through from about 11% of responses that subcontractors are raising prices along with the materials. While many of these responses grouse at subs for taking advantage of the situation, there is a suggestion peeking through all these responses that we are experiencing inflation across the board in the business. The big question here, of course, is: Will prices go down or will everyone use this as the moment to jack prices and further box-out affordability for a growing segment of the market?
Some of the advice offered echoed that given earlier, but not all:
"Lock in POs early and store the materials if needed." "Our service partners keep us well informed about the cost increases. We keep engaged with them through email and regular phone calls. We have also been including shared-cost escalation clauses with our subs."
"Subs are happy when contractors handle the materials, however this can only happen when warranties are given by the sub."
6. Have you lost any jobs because the price of materials at this time is too high, or the wait times are too long? The amount of work being lost or delayed is startlingly high, with 70% of respondents reporting "yes," and many offering more elaborated versions. Here are a few standouts:
"Yes. We had a big project that saw lumber package increase of over $60K alone. The total increase was more than the client could handle and we lost the job." "For sure. Usually booked for the whole year by now. Not that way now."
"Yes. Several clients decided to wait hoping prices will return to a more normal level at some point. Unfortunately, I think some of the manufacturers are liking the increased revenues and are holding prices high because they can."
"Yes. The clients have asked us to requote the project and it ended up going up, not down. They are going to wait and hope that things correct and they will be able to do the project at a later date."