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Staying Ahead of the Pricing Bandwagon

In the July 2004 issue, we covered the meteoric rise of steel prices, at the time not knowing when the steel manufacturers would give their U.S. customers a break. Well, it seems that the prices leveled out for most folks shortly afterward, at more than double the levels at the beginning of the year (triple for a Georgian and an Indianan). One Floridian reports a price rise last month. While steel prices have settled down for now, others are starting to rise that are impacting the industry, too.


Only one contractor, from Illinois, reported other contractors going under as a result of rising steel prices: “Many small contractors have gone out of business because of the increased steel prices. The decline in the profit margins and payouts that have started to drag mean everyone in our market is chasing money. The general contractors are trying to collect from the owners, and all the subs are trying to collect from the GCs, and suppliers try to collect from the subs—it’s a vicious circle and those subs without anything behind them haven’t been able to hold out the 60 to 90 days for the payouts.”

But according to an Idaho contractor, “some structural steel companies are also heading toward bankruptcy. Another contractor from Colorado adds that “electrical contractors are struggling, and the steel fabricator on a current project is struggling to produce the materials. The rumor is that he’s being killed on some of his projects steel–price-wise where he did not have any protection. It affects us indirectly because he’s not able to get his work done in front of us. He’s on COD, which usually indicates there’s something coming down. The project is so close to being complete with most of the iron up, that the GC is taking care of the fabricator’s bills for now and deducting that from his invoices. Another friend in the steel storage-tank manufacturing business has been hit hard in a very competitive market, being squeezed to lower his prices but being unable to secure any guarantees on his steel. His competitors have the same problems, and it’s a case of who can hang on the longest. That’s not a good place to be.”


Contractors as a whole seem to have weathered the steel price-rise storm, some breaking even but the majority eating the price increases. “Overall, we’ve seen our margins tank,” reports one of the Colorado contractors interviewed. A Nevadan puts his losses at $150,000. Says a supplier from Colorado, “In some cases, projects that could have turned us a profit, we were paying people to buy the material and even paying to deliver it to them—accounting for maybe 10 to 20 percent of our overall volume.”

The Idahoan says, “It’s always hard to measure exactly what one has lost. We know we have gone over budget on the steel stud portion of some projects. What is harder to quantify is if a job was going to be under budget, and maybe it met budget, but how much did you lose because it would have been under budget had you not had the steel increases? Or how much did you lose because you bid a project factoring in the price increases and your competitors didn’t?

“Competitors don’t always do as detailed an estimate as we do, maybe putting a unit price on things without regard for the components within it. They may get burned, but we also don’t have that project and we don’t make money on projects we aren’t awarded. What we do know we lost based on being over-budget on projects in steel stud purchasing approaches $100,000.”

“The only out,” according to the Illinois contractor, “is if the contract included a schedule and they’re behind schedule so you can go for an increase.” He also added that on slowly evolving government jobs that had to stick to a budget despite rising steel prices, projects were re-bid multiple times until enough people made mistakes for the project to be within budget.” Someone surely was making a loss there, too.

The key issue is having enough warning of price increases to be able to factor them into bids that are often submitted months ahead of contract signing. As the Colorado supplier notes, “These losses all behind us now, as once we know what the price is, we can use it.”


So what about price guarantees that could give contractors that needed measure of security? They are starting to reappear, but credibility has been shaken, as the Idaho contractor points out: “Now that the prices have stabilized, we are finding suppliers and manufacturers more willing to issue price guarantees, depending on how far out a project is. They are comfortable with three to four months. But because there were projects we thought we had locked in before that they were not able to honor, it makes you wonder how good their guarantees are at this point.”

The two-month guarantees an Indianan is receiving provide more security than those being offered by an Arkansan supplier “who guarantees prices to the end of the quarter, whether that is three months or three days away.” But these are better than those being offered to the Illinois contractor who receives no guarantees. “I’ve seen quotes that were good for four hours!”


The good news is that lead times are almost back to normal as supply comes under control—one to three weeks in most cases, although heavier gauges are still a problem: “12-gauge is still six to eight weeks out” (Illinois), “16-gauge in eight weeks” (Colorado).

Some minor project slowdowns were reported earlier in the year, but nothing significant. On the plus end of the scale, the Indianan reports, “I just had a job that we ordered six semi-loads for and we received it in about four weeks, which is really good for that size project.” On the negative side, the Arkansan states, “Allocation of steel is really cutting everybody real thin.”


Which brings us to another little piece of silver lining in the rain clouds. While contractors seem to have done little in the way of hoarding, partly because they did not want to sit on higher-priced steel if the prices dropped, they have enjoyed one small benefit: less wastage.

“Our project managers and superintendents became much more aware of product wastage,” reports the Idahoan. “They were hoarding it internally, reducing wastage from about 15 percent to 5 percent. Before prices rose, if the project managers had steel stud products leftover at the end of a job, they might bring it back, send it to another project or throw it away. Now, people are very, very conscious about bringing it back in and taking good care of it, not running over it with a forklift!”

A Colorado contractor reports the same phenomenon: “We took a 200-foot section of wall we were working on and told the foremen how much more that wall cost now, compared to a few months ago, and they were just flabbergasted. So on all projects, they are taking all their cut pieces and piling them up to use for kickers and support. They’re telling everybody to leave that pile alone.”


While steel-job delays from lack of supply were not significant, several contractors had seen signs of projects being redesigned for use of other materials as a result of steel price increases. But with concrete prices going up, and wood supply and pricing so volatile as a result of fires, disease, etc., it’s hard to see any major or permanent shift from one material to another.

“We’ve certainly seen projects on the drawing board that would normally be for steel, and it is very likely they’ll go to wood,” predicts the Idahoan. “Steel has always been more stable, which has been one of its strengths. Suddenly that has been thrown for a loop, and now it’s anybody’s guess as to which direction it’s going to go.”

“I had been changing everything I could from wood to steel,” says the Illinois contractor. “But with steel prices rising every couple of weeks, I converted some of my framing back from steel to wood because I could guarantee the price of wood, but not the price of steel. Steel prices are still higher, but the concern about the availability has gone, so we’re back to framing everything in steel. We just pass the increases along. We’re looking at a very busy fall and winter. Some design-build projects have changed from steel because of the long lead times for 12- and 14-gauge. We had some engineers redo some drawings and drop down to lighter gauge material instead of 16 inches on center. So, we have done a little bit of re-engineering.”

While contractors from Georgia and Indiana report a few light commercial jobs have changed from steel to wood, the Arkansan claims, “Many builders are now going to wood. On about 20 percent of our jobs we’ve started with a set of prints for the whole thing in steel, and some time after that they’re hollering about a new set of prints. When these arrive, half the job is in wood. A short while later, the prints come back as all wood! It takes a lot of time to redo the same prints because steel prices are going to cost the owner too much to be able to afford to build a project. In an industry that normally is predominantly steel, we’re seeing a major jump into the wood market, especially restaurants and smaller businesses.”


Enormous demand from China started off this whole escalation of steel prices, creating shortages and ultimately forcing U.S. owners to pay more for their buildings. The Chinese are not just using steel. They are using much more concrete than they make, too, as they build dams, roads, apartments, huge office blocks and structures for the 2008 Olympics.

Half the world’s cement supply is going to China. This has driven up U.S. prices about 25 percent as of August, and slowed or stopped projects in 29 states as cement becomes hard to find. The irony is that the United States has, until recently, imported 25 percent of its cement from China.

Right now, 114 U.S. mills are running at 100 percent capacity seven days a week, so they are certainly doing their best. Home costs are up about $6,000 on average as a result of cement increases alone, and completion times have increased 20 percent to 10 months in some key markets.

Surprise, surprise, contractors are running into the same key problem with cement as they did with steel—of not being able to bid with any certainty because they cannot predict the price between bid and contract. So the next question is, Is China also diverting our wallboard and other building materials?


“Drywall, acoustical products—just about everything we use is going up in price as a result of rising fuel costs, inflation, and whatever is remotely related to steel,” says the Idahoan. “With metal studs up 150 percent or more, drywall up 15 to 20 percent, a safe estimate on overall increases in prices this year is at least 25 percent. Some of that is recoverable by raising our prices, but not where we’ve already secured the project. Then we eat it.”

Other contractors have similar complaints:

“[Wallboard] and insulation have been going up 10 percent every month or two, jumping on the bandwagon. When one product starts going up, everybody takes advantage of it.” (Georgia)

“A lot of the other materials are increasing in price—drywall, wood products and insulation—by about 20 percent over the last three months.” (Indiana)

“Everything is going up. We just received a memo from one of our suppliers: ‘Due to increasing costs, it is necessary to increase pricing on all gypsum, tile backers, cement board, joint compounds, powder compounds, drywall joint tapes, vinyl trim and accessories.’” (Arkansas)

“We’ve had an increase in pretty much everything this year: steel, concrete, insulation, drywall, wood—every product we use has increased in price by an average of about 50 percent overall. Labor has increased 6 percent. Residential builders in this market have been complaining that their material prices have gone up 30 percent. They sold the houses three months ago and are taking all the material increases and building houses at cost or at loss—and then trying to pass that loss on to the next buyer.” (Illinois)

“We’re seeing wallboard prices rising and they’re saying it is mostly the increased cost to produce the material. Boy, there are all kinds of guesses on whether that’s correct or not. I think the prices are going up partially because of fuel costs, but my speculation is that they might be jumping on the bandwagon a little bit, with the price of steel going up.” (Colorado)

“All prices have risen since December, about 15 percent without metal, which is up 85 to 120 percent. Wages are going up, too” (California).

“Insulation, drywall, stuff like that, have probably risen 35 percent just because the manufacturers can, just like steel and lumber. Of course, rising fuel prices and increased demand account for some of it, because it takes energy to manufacture and to deliver materials, but not 35 percent.” (Colorado supplier)

“Some things made of steel, they’ve just now caught on, and I’m receiving increase notices for September but they hadn’t gone up at all this year. I don’t know if they had a backlog, but it’s weird because it’s not consistent. You’d think metal would be metal and things would go up evenly, but some products went up a whole lot more than other products. There’s some gouging, obviously. Drywall has had three or four increases this year, up 20 percent.” (Second Colorado contractor)

“Board is becoming an issue; it has increased probably 20 percent in the last three months. And there’s an allocation issue—it could be four to eight weeks lead-time depending on what product and how much you need. There is some speculation that the board manufacturers are following suit with the steel, just because they can. I have heard of material suppliers not holding their numbers, and that’s how it has affected us adversely.” (Nevada)

The Nevadan continues to express an opinion that perhaps the entire industry—manufacturers, suppliers, GCs, subs, etc.—could work on putting into practice: “Some of our front-running material suppliers have taken it in the shorts and held their prices, so we’ll help them out on the backend with other work. It’s a give and take. These are partnerships, not adversarial relationships, even though most people in our industry don’t agree. We benefit from helping each other. There is nothing better than a happy job site! Our competitors beat up the material suppliers to benefit themselves. They don’t look at it as a long-term relationship but as a short-term gain.”


And so what of future steel prices? The Idahoan reports, “I heard from a structural steel fabricator last week that scrap prices are rising again, so that doesn’t bode well for the future.” One Colorado contractor reports “an expected increase in October of around 15 percent and stabilizing through the end of the year,” while a Colorado supplier thinks “prices will drop a bit in coming months.” A Nevadan figures we’ll see “quarterly increases of 5 to 10 percent.” In other words, predictions are all over the map, but within a narrow range—although the other Colorado contractor predicts “steel prices will remain stable until China kicks in again and raises the prices.”

On this basis, escalator clauses, short price-guarantee times and any other techniques to protect oneself from price increases for steel—or any other material—is a smart idea. Once burned, twice foolish, as they say. It’s the owners that pick up the tab, and the only possible danger is that prices will rise so much that they will throttle the great construction engine that is driving our economy.

The Idahoan is concerned about this issue: “Higher material prices aren’t necessarily a bad thing, because it gives us a greater basis for marking up. However, it’s a question of everybody acknowledging the increased pricing. Another concern is that projects may be priced out of feasibility—it now no longer pays to build this building because it’s too expensive. So, there is a fine line between trying to maximize potential for profitability and pricing yourself out of the market.”

One possible conclusion: You have to be awake to survive in this market.

About the Author

Steven Ferry is a free-lance writer based in Clearwater, Fla.

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