When material costs go crazy, what can contractors do?

The pandemic has proven that the global market can be extremely volatile, especially for manufacturing businesses. From rising energy costs to unexpected fluctuations in raw material costs, unforeseen obstacles have destabilized many supply chains and made it tough for manufacturers to remain in business. These are certainly not new problems, seeing as material costs for production can skyrocket and have skyrocketed globally at many points in time in the past.

Studies have revealed that, on average and across seven inputs, raw material prices have increased by 117% since 2000. The volatility of raw material prices has proven to be an almost permanent phenomenon, leaving it up to manufacturers to either find means to put up with additional costs, search for new ways to lower costs elsewhere, or transfer price increases to the next entity in the chain who are already reluctant to spend.

If you are the type of business owner that chooses to just wait for the market to stabilize, your business may not be able to survive the intermission. A business needs to be able to find other ways to adapt and adjust to new market conditions. Businesses that can do this will even find at times that they are able to grow stronger and make more profit.

So what can you as a business owner do when material costs go crazy?

Track prices

Raw material prices change with some level of predictability. In fact, prices of the materials often rise and fall in a recurring manner, so you can be sure that if the price of a commodity rises, most times, it will fall at some point. In addition, with some basic understanding of economics, you can utilize historical data found in online databases such as The Commodity Price Index (CPI) to predict with some degree of certainty the rate at which prices change. By doing so, you can develop a system to better manage changing market conditions.

Another measure that can be taken to protect your business against unexpected price changes is through contracts. Through contracts, businesses typically believe that a “force majeure” (Greater Forces) clause is all they need to keep themselves protected from unseen problems. In simple terms, such a clause will protect contractors from delays that are caused by Labor strikes, acts of God, terrorism, and the like, that neither party can control. However, should a pandemic arise and alter global markets then such a clause won’t hold in courts.

Instead, contractors have to think of integrating an “escalation” clause that allows them to pass along pierce changes to the consumer. This, however, is a sensitive issue that needs to be handled with care. Try to communicate the details of the escalation clause to the client, and be as specific as possible. Most will require you to determine specific materials subject to the clause rather than allow it to be inclusive. 

For example, if you have been contracted to build a house, and the costs for acquiring lumber have increased then an escalation clause would only be able to protect you if the lumber was specified within the clause. 

However, since most businesses don’t practice such disciplines, they are required to rely on other cost-cutting efforts to minimize potential losses.

Optimize costs

Technology is the most important investment that contractors across industries can make to optimize costs. Changing prices or not, cost optimization is what all successful businesses strive to achieve. Finding a way to incorporate field management technology will help contractors manage time better, reduce material waste, ease communication - all of which carry the potential to cut costs. 

If a field service project manager wants to know who from his team is working at job site A for a particular client, he can simply use his field management software on his phone to track the location of each team member within seconds. If the architect together with the owner has made last-minute changes to the blueprint of a house, then the site manager can easily access it from anywhere.

In absence of information and coordination, rework happens all the time - especially in construction, painting, landscaping and similar - and a huge amount of material is wasted in the process. When market forces push prices up, businesses have to think outside of the box to optimize costs and field management software can be your scapegoat.

Find ways to go leaner

Any contractor can benefit from small enhancements in productivity. Lean methodologies are seen as systems that help businesses optimize internal processes. Every minute spent optimizing and automating business processes means that more resources will be available to be spent elsewhere, or - if necessary - removed completely.If you have never heard of lean design, then we recommend reading the following article from ContractorMag “Lean Methodology for Contractors”. In most cases, construction is mentioned as the only industry within the contractor realm that has not been able to experience the same increase in productivity despite the advancements made in technology. No wonder people working on the industry are continuously complaining about it.

To combat this, lean methodology seeks to break down traditional silos by reorganizing processes and materials used so that more value is extracted from them.

According to the Lean Construction Institute, everyone from architects to suppliers to end-users is involved in this reorganizing process to ensure that deadlines are met, and budgets are contained. Lean construction also reduces safety hazards while improving cost savings for all involved parties.

Studies have shown that by using lean construction, companies can reduce material waste by approximately 64%. Lean construction also increases employee accountability, resulting in higher quality service and goods. Improved project satisfaction helps to stimulate employee confidence and attract new clients for future construction projects. While lean construction requires training and professional expertise to get started with, the ultimate rewards far outweigh the initial investment.

Find temporary or permanent substitutes

If possible, seek alternatives to the raw materials you currently use. You might just be able to find these new materials at more affordable prices.

Going on a quest to find the cheapest raw materials will require time. If you decide to spend more time on finding the “perfect” supplier, you may end up delaying the project. Therefore, make sure that you have enough breathing room between the “find supplier” deliverable and the next one in line… and don’t forget to track the time you are spending, it is easy to lose track of the time you allocate towards these kinds of deliverables.

As funny as it may sound, avoid cheap-priced products

When in search of suppliers during times of price instability, you certainly do not always want to go for the supplier who offers you the lowest price. Like many things in contracting, you get what you pay for. Radically lower costs could connote low quality that could, in turn, negatively affect the quality of your product or service. Paying low amounts will also reduce the effort the supplier will put into your order. In other words, you will be at the bottom of their list, if cheap is what you choose - which is understandable because the supplier is a for-profit company that wants to maximize the time spent on profitable projects. But what if the margin they have is high enough for them to afford the cheaper prices? The market regulates the price, if one contractor is cheaper than the other then he either (1) is working with lower margins, (2) he has materials that are worse in quality. In both circumstances, you as the buyer will be challenged in the future if the cheaper alternatives is what you opt for.

Ultimately, what you do depends on countless factors, including a budget, project size, client demands and more. We’re not claiming that you should not pick the cheapest option, we’re only cautioning you on it.

Find the scope creep and kill it

If you have some project management background then scope creep should be something familiar to you. For those that don’t know it, scope creep can be visualized in the form of a virus that enters a project and bloats its requirements over the project's lifecycle. For example, let’s assume that you are an architect tasked with designing a modern $3,000,000 house, however, in the process, a pool gets added, an outdoor basketball field, and a large balcony that is accessible from three rooms. As the customer needs change, the project starts to get assessed and its requirements start to shift. Now, imagine this happening in a construction project where the contractor is required to purchase additional materials ad hoc. What do you think are the chances that they will purchase the wrong amount? Well, pretty high! 

The scope creep should be avoided when possible. One way of mitigating it is through contractual obligations that were previously explained, You want more? Well, you have to pay for more time and money.

We hope that reading through this article has given you a basic overview of where things can go wrong for contractors. If you are interested in reading more about project management for contractor businesses then we recommend looking for online studies that are based on quantitative research.

In the meantime, if you want to get started on tracking time to see what is taking more time then we invite you to try Atto for free.