Twelve years building and this is the most inflation I’ve ever seen in our construction costs. At the writing of this article, lumber is up 256% year-over-year.
And if you take that news with a respectable “Thank you sir, may I have another?” attitude…well, the answer is yes, you may have plenty more. Drywall, steel, spray foam, and just about everything else you can think of is either up or way up.
The good news is we are builders, and we don’t take it lying down. We fight, dammit. So, here are a few strategies to help you slay the inflation beast at your door.
In your contractor base agreements you need to establish an amount of time your trade partners will honor their pricing. Obviously, for you the longer the better. 30 days is common, but I’ve seen some people get away with 60 or longer.
Avoid Trigger Happy
When prices are up, learn the nature of the situation. Ask lumber yards and material providers what they are anticipating in the market. Do a little research.
Is the higher pricing a structural change that will probably persist or is it a quick uptick on the screen? If it appears to be short or fluid in nature, you may consider waiting until later to accept that bid, assuming you have a little time to wait.
Price Escalation Clauses
These clauses only apply if you are using fixed price contracts with your clients. Price escalation clauses exist in a lot of promulgated builder contracts. In the Texas Association of Builders contracts, they have a section called “Escalation of Certain Materials Categories” in their fixed price contracts.*
This escalation clause allows the builder to pass along the cost increases in excess of 25% using a baseline of the builder’s costs for that material over the preceding 30-days from contract execution. Note that it reads “in excess of 25%.” That means you get to eat the first 25%, so you’re still covering the first part of the overage. For that reason, this clause serves as more or less a “stop loss.”
A bit of advice before pulling the trigger on this clause with your client: while you have the right to do so if it’s in the contract, they also have the right to be pissed. Pissed clients are never a healthy goal, so I recommend trying the other measures I’m listing before this one.
For you cost-plus disciples who are reading this and sipping your rosés with your pinky finger raised, well, read to the end my friends. In cost-unstable environments it can be difficult to properly navigate fixed-price contracts. Note that I said “difficult” and not “impossible.”
Nonetheless, cost-plus contracts do allow you to pass the pricing risk off to your client. That’s THE largest benefit to cost-plus contracts. If you are having trouble sticking to your budgets in the current climate, this is a good option.
If you go this route, be sure to include a large contingency for your clients so that they can properly plan for the uncertainty they are taking on. And remember, there is no denying that even though you have the right to pass along all these cost overages, if the price tag of the project is well over the original estimates you will have, as I referenced earlier, a pissed client. And pissed clients are a leading cause of stroke, heart attack, and erectile dysfunction amongst builders.
Someone in our Instagram community suggested this, and I second his opinion. When price pressures creep in, it’s a good time to evaluate waste in the company.
Cut waste in the literal sense, such as investing in more accurate lumber and material take-offs. Also look at cutting waste in a more liberal sense. Where are you spending unnecessary money without any correlating return from your clients? Recurring software payments for platforms you don’t really use? Extra space in your office that you could sublease? These may not be right call for your company, but something is. You just have to be on the lookout and comb through your existing practices with a fresh perspective.
If lumber is through the roof, it may be a good time to value engineer. Should you consider roof trusses over cut roofs? Should you switch to 24 inch on center framing versus 16 inch centers? Whatever you are looking at, there are almost always multiple ways of doing it.
We are hearing of major shortages and delays with Hardie siding, so we are evaluating brick or stucco in lieu of that material. What can you swap out for something else and still achieve a similar end result?
With this tip we are doing a swan dive into a pool of the obvious, but I have to say it. When prices are through the roof like they are now, it makes more sense than ever to get a few bids. Some lumber yards may have a little better deal than others right now based on their inventory and cost basis, and that can possibly flip next month. So check around a little.
It sucks to get squeezed on pricing, but there are always solutions to be found before throwing up your hands. We get paid to solve problems in this business, and this is no different. The show goes on, so let’s build on.
BTW, if you are looking to improve some of your company’s systems, head on over to the Building Optimal Shop to check out some of our swag to build a better business. Proceeds go to benefit, Exponencialistas, my non-profit investing in entrepreneurs transforming their communities in Latin America.
*The Texas Association of Builder contracts were written by the attorneys at Bush Rudnicki Shelton, who I’ve had on the podcast several times covering legal topics.