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holding material cost’s

JordanBuilders | Posted in Business on October 18, 2004 08:25am

i’m sure others on tbhis site have experienced this;

-potential client calls

-estimate is worked up for labor and materials for turnkey with (in my case), a 30day limit on materials pricing on the preliminary estimate.

-client okays the preliminary within the designated time frame and final contract is submitted and signed within the thirty days.

-job starts with land clearing and footers and by the time the foundation is complete i’m getting prices in higher for materials on the subfloor than what i had for a quote from my supplier, and still a long ways to paddle.

fact is, that i have surpassed the thirty days, and in most cases will surpass them for quotes given to me from the supplier prior to even figuring the preliminary estimate. i talked with my supplier afer the second time i got stung and their take on it was to add ten percent each time for material cost fluctuations. now i’ve heard all the la-la about materials needed for rebuilding iraq, and for hurricanes like every other builder when the suppliers are have to jack the cost’s to cover their bottom line. adding ten percent just for the heck of it seems to me like a viable solution if,,,, thats all the cost go up. also there is the possibilty that i loose out on the bid for a markup which on a decent size home could add near ten grand in the overall scheme of things. i’m like most on here and get work as a result of word of mouth and reputation. reputation alone wont make you a shoe in for price only types looking for the most competive bid. i’ve thought about it and figured if i took ten percent down on all materials, and paid the suppliers that ten percent, that it might be viable to put a cap on the prices with the deposit holding them there. has anyone gone this route? what are some of your practices to keep a lid on things and still remain competitive with severe fluctuations in the materials. i’d appreciate any feedback.

j. jordan

www.jjordanbuilders.com

 

 

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Replies

  1. gdavis62 | Oct 18, 2004 09:17pm | #1

    If you are able, get a material price escalation clause in your contract.  Google for the suggested clause the NAHB has put together.

     

    1. JordanBuilders | Oct 18, 2004 11:04pm | #5

      thought about the clause. good idea, but,,, ususally in the end,,,, cost too much for the homeowners budget, that damned budget! and,,, they usually wont sign something open ended,, at least i've not had that kind of luck on large scale, turn key. thanx for the heads up on the nahb, i'll go check it out.

      j. jordan

      http://www.jjordanbuilders.com

  2. Isamemon | Oct 18, 2004 09:28pm | #2

    I agree with Dylan on the NAHB info. It is good

    however herer is what I run into

    For me big projects and houses require Bank Loans.  Most times for me anyway, the bank will nto take the clause the NAHB suggests, in a contract, nor will they try to bump a contract for increased costs

    2nd, often the owers have to put so much up for designs, closing, etc, they dont have the pocket change to come up with more

    Few builders can do what a friend of mine does, he signs a contract, gets the start from the bank, and within a few days, pays the lumber yard for all materils out of his pocket. Sometimes he has to take delivery of some of the materils right away and if so puts them in a storage yard

    Prices I have seen since June

    1/2 cdx up 31%

    5/8ths 16%

    7/16 osb 8%

    2x6 d.f.studs up 28%

    2x10 random up 16%

    I have a house under contract, and unfortuantey I have to absorb those increases.

    And I agree if you bump prices too much to cover the cost of potential increases you might bid yourslef out of the game.

    sorry

    good luck

    1. BobKovacs | Oct 18, 2004 09:40pm | #3

      "And I agree if you bump prices too much to cover the cost of potential increases you might bid yourslef out of the game."

      Well, bidding yourself out of the game might not be a bad thing if it's going to keep you from doing the job for free.

      Given that pricing has gone nowhere but up for a while now, what would make anyone believe that prices were going to stay stable (or heaven forbid, DROP) anytime soon?  Therefore, why would you not  include $$ to cover this increase in your pricing?   To not do so means that your profit will be reduced and/or eliminated- so what's the point of even doing the job?   I guess you're still working to get experience? lol

      Until such time as prices start to drop, you're exposing yourself to an enormous risk by not including moeny for material increases if you can't include an escalation clause.  Another option would be to require a large down payment and pre-purchase the materials up front as someone suggested.  You don't necessarily have to take delivery- just pay for the lumberyard to supply in the future at today's dollars.

      Bob

      1. JordanBuilders | Oct 18, 2004 11:11pm | #7

        so,, are you putting that clause in your contracts and not meeting with resistance? if so, enlighten me on a little sales tactics please. i'm with you on the working for experience,, got plenty of that, i'll take the money please! thanks for the insight

        j. jordan

        http://www.jjordanbuilders.com

    2. JordanBuilders | Oct 18, 2004 11:08pm | #6

      i have not broken it down inot percentages as far as increases. i'm gonna do that very thing, a light bulb just went off in my head about sales tactics for better hurry while you can still afford it! lol! i deal with the banks on the same issues. bottom lines and draws upon completion,,,, which still leaves me, the material broker, (think  mr. lykos said this), with the proverbial bag because the suppliers increase the costs. kinda makes ya' wanna contract with the supplier as well huh? thanx for the inpu.

      j. jordan

      http://www.jjordanbuilders.com

  3. User avater
    BossHog | Oct 18, 2004 09:42pm | #4

    I've been in situation in the truss business where we've gotten burned pretty bad. We often bid big commercial stuff in the late winter/spring, then end up getting the job in late spring/summer when lumber prices have risen significantly.

    So when we're about to take on a huge project, but BEFORE we're locked in - We talk to our suppliers. Sometimes we've ended up asking for enough money up front from our customers to buy material to cover most of the project. Other times they've agreed to hold prices for a specific project for a set period of time.

    Lumberyards may agree to hold prices if you give them a deposit, or agree to buy a set amount of your materials from them. Depends on the yard, I guess.

    Q: What's the difference between a woman's zipper and a man's zipper?
    A: When a woman unzips her pants, her brains don't fall out.

    1. JordanBuilders | Oct 18, 2004 11:27pm | #8

      ten percent down is the only card i have to trump the rise in cost's. seems fair as far as a risk to both the homeowner and the builder, plus the lumber yard is at least gonna have guaranteed sales for that allotted bulk, which is pretty sizable, most houses i build run 300 plus. thankyou for the input, sorry 'bout the truss burn i know it hurt, and by the way is exactly the situation i've run into,,, scheduling out only to find i gotta back out after seeing the gain in cost's.

      j. jordan

      http://www.jjordanbuilders.com

      1. gdavis62 | Oct 19, 2004 12:52am | #9

        In todays volatile market for plywood, OSB, and even sticks, none of my four possible suppliers will honor a price quote for the duration of a project.

        Two of the four used to do it.  Now, from all,  it is price in effect at time of shipment, and prices change weekly.

        A deposit would mean nothing to my lumberyards.  The only way I could be guaranteed of the prices used in a framing package quote, would be to buy, that week, the entire framing package.

        Maybe you can tell your clients that the cost of having a fixed price contract, without an "open end," is equal to the cost of money for the materials package, extended out from quote time through delivery.  It also might include storage costs. 

         

        1. JordanBuilders | Oct 19, 2004 02:25am | #10

          yup, your right on with the delimmna. and who has an extra carport or steel building to store the materials early. i actually had a long talk with my sales guy at the yard and we came up with a plan to secure the materials at ten percent no longer than 60 days. thats meeting in the middle and a step in the right direction. we'll see what happens from here. thanx for the feedback.

          j. jordan

          http://www.jjordanbuilders.com

          1. gdavis62 | Oct 19, 2004 03:07am | #11

            Does that mean that he will hold pricing on your lumber package for 60 days if you give him an upfront 10 percent of package cost?

            Let's say your lumber package is $60,000, as quoted today.  You say, "OK, I'll commit," and you give him the agreed upon 10%, or $6,000.

            45 days later you call and say, "OK, I'm ready, and deliveries will take place over the next two weeks."

            Let's also say that some wild spikes have occurred and the package price, 45 days out, would be $69,000.

            I don't get it.  What did your guy do with your $6K for 45 days, that make him willing to now eat $9K in lost billings?

            Or maybe it's this.  He brought in your whole order, into HIS warehouse, when you committed and paid him the $6K.  The 6 is what you paid for storage, double handling, and financing.

            What happens if your client dies, or disappears, or simply cancels the job?  Do you get all your $6K back?

          2. JordanBuilders | Oct 19, 2004 03:56am | #12

            haven't gotten that far. the initial agreement, by way of horse trading ethics is this; i provide a client that will build this house on contract. the contract is governed of course by the bank. if the client dies and the bank has lent out money for the building of the (in this case a log home), and midway through the loan holder passes away, they are not going to want to see a half way finished project sit and rot when they have lent the money out for it's completion. can't sell a half built house and i'm not gonna proceed if the draws stop. of course i've never crossed this bridge before with a passing client and my take on general job proceedings is to take a ten percent deposit on the job for scheduling, setting up equipment, pulling permits and in my opinion the ten percent is to insure my clients commitment to my company. they pull the plug when i've turned down other projects then the ten percent of the job is the least compensation i think i'm due for lost profits and so forth. the ten percent i am going for on material costs are directly for that purpose and that purpose alone. this is new territory for me being that i will be taking more down on the job than usual. but,,,,, given the client wants a fixed cost in a volitile market then what else can i do? if the client passes and the initial ten percent down was already paid to the supplier seperate from my own companies' ten percent then i'm fine if they keep the deposit. both parties are compensated (myself and the lumber company), and no harm no foul. i know there will be some that would say there is lost profits on the material markups and that is just, as far as i'm concerned. the problem still is,,, who holds the bag on material's potential skyrocketing prices. i'm just looking for away to cover my own interests, no different that the homeowner, the banking institution and the lumber yard. been burnt enuff to know where to look for the heat. i appreciated the analogy on the lumber package at 60k being finalized to 69k in due process. i just wanna make sure that when the music stops, i'm already seated.  this is new territory for me and i appreciate the questions, it helps me consider all aspects. thanx again

            j. jordan

            http://www.jjordanbuilders.com

          3. gdavis62 | Oct 19, 2004 04:35am | #13

            I take it the bank has agreed to your first draw "deposit" of 10 percent of the contract amount before any work has taken place?

            If this job is a log home package, what percentage of the total building material package cost is in the package price from the log home manufacturer?

            Building packages from log home manufacturers typically include most all the lumber needed for the whole job?  Is that the case with you?

            Has the log home package source committed to a fixed price for the job?

          4. JordanBuilders | Oct 19, 2004 05:37am | #14

            not the case with me. i do custom. log home packages cost approximately 35-37%. customs cost 25%. same product, skip the ridiculous markup on  materials and there is enough pie left to eat and the table as far as labor cost's. the bank,,,,,their not the ones at risk,,, i am. if the homeowner can't agree because of the bank, then they can't have the log home by me. incidently,, no difference from a "kit" manufacturer. they take ten percent and the balance on delivery,,, which sucks if you have the logs, floorsystem, roof package, windows and doors package and in some cases the porch packages all sitting on the ground at once. and of course the home owner frantic about hurrying up because the logs are on the ground getting rained on. whole 'nother story.

          5. JordanBuilders | Oct 20, 2004 06:26pm | #15

            thankyou for your post's and insight. finally finagled a deal with the lumber yard and it's a decent program for all involved. ten percent down initially at signing of contract to secure prices for duration of project. balance paid on each segment upon shipment. i.e. floor package is paid in full upon delivery. there will be some holding of standard materials that is kept at the yard year round but i was assured of no double handling fee's or storage charges since it (in this case yellow pine flooring) has a place where inventory is kept and they did not mind storing it till i was ready for delivery. we'll see how it pans out. i learned a lot from yall's post's and i appreciate it. allways helpful to hear others perspectives.

            j. jordan

            http://www.jjordanbuilders.com

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