Holding the Line on Costs

24, May 2017


Strategies to fight the price increases that are chipping away at your profits   

By Ed Hauck
Builder Partnerships Senior Consultant

Cost increases are on builders’ minds right now. It seems like prices for materials and labor are going up on every new bid. It’s across the board on building materials, with lumber prices being particularly volatile in response to the recent tariff on Canadian lumber.  

There was a time when builders could just pass these price increases on to buyers by raising their prices, but at this point, I don’t think the market is strong enough to start creeping prices up. First- and second-time buyers are concerned about increases in mortgage rates, so it’s a sensitive time.

The best bet is for builders to work with suppliers to get long-term deals and some price locks from manufacturers and trades. The way to do that is to use whatever volume you have as a negotiating point. Go to your manufacturers, let them know what you have coming up, and commit to using them exclusively in exchange for a better price. If you’re a small builder, tell them what you have on the books for the next six to nine months. Don’t bid out a house or a community; bid out your volume.

Here is an example from my own experience. As I’ve already noted, lumber pricing is very tough to predict right now. When lumber pricing was favorable, suppliers were doing six-month price locks; now, they’re doing 30-day pricing. I talked to two different companies that said if I can commit my volume, they can help hold that price longer. As a result, I got a 120-day lock on price for a block of homes.  

The point I am making is that your suppliers may be able to help you, but you have to ask them. Talk to the manufacturer and the distributor. Get them working together; it’s usually worth the effort. Take windows, for example. I have a window supplier and manufacturer. By bringing in the manufacturer, I was able to negotiate a one-year lock for a commitment for all my units.  

Starting the process

How do you find the manufacturer and supplier sales reps? Log on to Builder Partnerships, click on the list of manufacturers and then click on the contacts list for the manufacturer you want to talk to. Start the conversation with the most appropriate contact person. In most cases, they’re very helpful and willing to work with you to negotiate at distribution. If you need help, just ask one of us here at Builder Partnerships. We are happy to make those connections for you.

I do this all the time with every product I use as a builder. The key is to work the manufacturer and the distributor together, not separately. You want to create the relationship with both of them. At the manufacturer level, they have the authority to say, “This builder has 150 units and I want all of them.”   

Not only will the manufacturer help you get the best pricing, they’ll work with you to get the best service, product knowledge, back office support, and even help you write scopes of work.

Manufacturers also can help you negotiate the best pricing from trade partners. Ask them, “Tell me the A players in my market.” Then I can get with those trades and see if they can handle my volume. I’m not trying to beat people up on price, I’m negotiating to try to build a relationship. 

I have yet to find a trade or a manufacturer with which this approach did not work. The only sure-fire way it won’t work is if you don’t ask.   

 

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