As I write this, the images of devastation from hurricanes Katrina and Rita are still vivid in my mind. And while the Gulf Coast states suffered the direct hit and felt the immediate impact of nature's fury, these twin sisters of destruction have altered the economic landscape in ways that will be felt for months, if not years. In the construction industry building supply costs have risen quickly and drastically.
The prices of cement, drywall, OSB, lumber, plywood, PVC and numerous other building materials jumped before the hurricane season even began, and they've continued to rise steadily ever since Katrina made landfall.
Among the sharpest increases has been a 50 percent leap in the price of OSB, according to the Associated General Contractors of America. Cement, meanwhile, was already in short supply and is now running at record prices. PVC has doubled in price and may double again. And drywall, which had been rising for two years, has begun to creep even higher. Add in the higher gas prices, and the impact is significant.
So, how will this change the way you run your business? Will you pass the costs directly on to your customers? Sacrifice margin? Add an escalation clause to your contracts? Start billing time and materials? Any way you slice it, there are risks.
"What we've decided is that material pricing is risky no matter how we approach it," says Dennis Gehman of Gehman Custom Remodeling, who asked past clients and his staff what they thought about the possibility of adding an escalation clause to their contracts in order to protect against the potential for rising material costs.
"In general everyone we spoke to said they would be slower to sign because they felt it would no longer be a fixed dollar amount contract, it really would be time and material with only price increases being passed on with nothing mentioned about cost savings."
Gehman has decided to stick with his normal contract and pass the higher cost of materials on to his clients. The tricky part comes in estimating material costs today for jobs that won't be in production for two or three months.
"The final billing and questioning doesn't leave a good taste in the client's mouth or ours," Gehman says of the alternative. "Even though it's a risk, I'd rather have a fixed dollar amount contract and not have to bicker about the final invoice because they know upfront what it will be."
So, what will your strategy be?