How Contractors Are Handling Rising Product and Materials Costs
Pros in custom building, remodeling and design-build share their strategies for maintaining profits as costs go up
As you’ve no doubt noticed, costs for products and materials used in residential remodeling projects have been rising. In fact, 63% of firms cited rising product or materials prices as a reason their business costs went up last year, according to the 2019 U.S. Houzz State of the Industry study.
You can’t exactly do without products and materials in residential remodeling. And you can’t always pass on all the costs to your clients. So what’s a business owner to do to maintain profits? We spoke to four general contractors to find out how they’re coping.
You can’t exactly do without products and materials in residential remodeling. And you can’t always pass on all the costs to your clients. So what’s a business owner to do to maintain profits? We spoke to four general contractors to find out how they’re coping.
1. Track Pricing, Shop Around and Buy Ahead
Since suppliers typically notify their customers ahead of pending price increases, one option for fending off rising costs is to stock up before higher prices take effect, says general contractor Brad Leavitt, owner of Scottsdale, Arizona-based AFT Construction, which builds high-end custom homes. For instance, if AFT plans to install 4,000 square feet of a certain flooring in November, it gives the vendor a letter of intent as soon as the homeowner selects the product. Then, if a price increase notification for that flooring material comes in, AFT orders early.
To make sure the firm gets the best possible pricing, AFT employs two full-time project coordinators who handle purchasing for projects. “We are always continually shopping vendors and suppliers,” Leavitt says. While AFT is large enough to employ people dedicated to this, the idea applies no matter the firm size. “We’re doing 10 to 16 projects a year. A smaller company may be doing one to three as a sole proprietor. It’s still the same formula,” Leavitt says.
Since suppliers typically notify their customers ahead of pending price increases, one option for fending off rising costs is to stock up before higher prices take effect, says general contractor Brad Leavitt, owner of Scottsdale, Arizona-based AFT Construction, which builds high-end custom homes. For instance, if AFT plans to install 4,000 square feet of a certain flooring in November, it gives the vendor a letter of intent as soon as the homeowner selects the product. Then, if a price increase notification for that flooring material comes in, AFT orders early.
To make sure the firm gets the best possible pricing, AFT employs two full-time project coordinators who handle purchasing for projects. “We are always continually shopping vendors and suppliers,” Leavitt says. While AFT is large enough to employ people dedicated to this, the idea applies no matter the firm size. “We’re doing 10 to 16 projects a year. A smaller company may be doing one to three as a sole proprietor. It’s still the same formula,” Leavitt says.
2. Encourage Clients to Use a Mix of Higher- and Lower-Cost Products
One challenge with rising materials costs is the sticker shock among homeowners, and a way to cope is to shift the blend of products your firm uses. General contractor Richard Ryder owns design-build firm Clearcut Construction in Wake Forest, North Carolina, and has typically specified custom cabinets for his kitchen and bath remodeling projects. But amid the recent price increases, he’s instead encouraging homeowners to save money by selecting high-quality prefabricated cabinets and mixing them with custom cabinets and features to create a customized look.
For instance, in this kitchen, Ryder used a custom range hood and flanked it with two high-quality prefabricated cabinets. The cabinet with glass doors to the right of the hood is also custom. The island started out with a prefabricated base, and Ryder customized it with legs and skirting. The method of mixing prefabricated and custom features “saves customers money in design time as well as in the cost of the kitchen,” he says.
One challenge with rising materials costs is the sticker shock among homeowners, and a way to cope is to shift the blend of products your firm uses. General contractor Richard Ryder owns design-build firm Clearcut Construction in Wake Forest, North Carolina, and has typically specified custom cabinets for his kitchen and bath remodeling projects. But amid the recent price increases, he’s instead encouraging homeowners to save money by selecting high-quality prefabricated cabinets and mixing them with custom cabinets and features to create a customized look.
For instance, in this kitchen, Ryder used a custom range hood and flanked it with two high-quality prefabricated cabinets. The cabinet with glass doors to the right of the hood is also custom. The island started out with a prefabricated base, and Ryder customized it with legs and skirting. The method of mixing prefabricated and custom features “saves customers money in design time as well as in the cost of the kitchen,” he says.
Ryder has found that as their popularity has risen, reclaimed beams have also gone up in price. So he came up with a creative solution to get the same aesthetic: He buys lumber from big-box stores and distresses it to create a rustic look. This photo shows cypress beams that Ryder distressed for one of his bathroom projects. The cost is “50% of what you would pay for reclaimed beams,” he says.
Tallman Segerson Builders encourages clients to maximize their budgets essentially by floor. “[We] often suggest that they consider choosing more economical material finishes on their second and third floor, including less expensive flooring, hardware, tile and prefab vanities and tops through Houzz or other online retailers” instead of going with custom options, Segerson says.
Tallman Segerson Builders encourages clients to maximize their budgets essentially by floor. “[We] often suggest that they consider choosing more economical material finishes on their second and third floor, including less expensive flooring, hardware, tile and prefab vanities and tops through Houzz or other online retailers” instead of going with custom options, Segerson says.
3. Separate Selections from Construction
One strategy Ryder’s firm is using to help customers feel empowered during this high-cost time is allowing them to purchase products themselves. “We tell them that they can shop around, find these deals, find the promotions, as long as they’re finding the quality that they need,” Ryder says. “It’s allowances with a twist.”
Ryder encourages homeowners who choose to do this to select name brands and purchase products that are warrantied by the manufacturers. He’s upfront that his firm won’t be able to warranty products purchased by the homeowner.
A benefit of this strategy is that customers see that the rising costs for construction and remodeling aren’t the result of the contractor arbitrarily or artificially jacking up prices. “We’ve found that that’s helped a lot,” Ryder says.
One strategy Ryder’s firm is using to help customers feel empowered during this high-cost time is allowing them to purchase products themselves. “We tell them that they can shop around, find these deals, find the promotions, as long as they’re finding the quality that they need,” Ryder says. “It’s allowances with a twist.”
Ryder encourages homeowners who choose to do this to select name brands and purchase products that are warrantied by the manufacturers. He’s upfront that his firm won’t be able to warranty products purchased by the homeowner.
A benefit of this strategy is that customers see that the rising costs for construction and remodeling aren’t the result of the contractor arbitrarily or artificially jacking up prices. “We’ve found that that’s helped a lot,” Ryder says.
4. Bid Larger Projects or Work on a Cost-Plus Basis
Another option for compensating for rising products and materials costs is to bid larger projects, Segerson says. These projects tend to have a lower profit margin than small projects, but the profit itself can be greater in real terms, helping builders cover their annual overhead.
Another option is to work on a cost-plus basis (also known as time and materials) rather than a fixed-price (or bid or contract) job. Cost-plus “allows more flexibility for cost increases and can provide more allowances to clients, giving them the opportunity to have more control over their budget,” Segerson says.
To share with your clients: Construction Contracts: What to Know About Estimates vs. Bids
Another option for compensating for rising products and materials costs is to bid larger projects, Segerson says. These projects tend to have a lower profit margin than small projects, but the profit itself can be greater in real terms, helping builders cover their annual overhead.
Another option is to work on a cost-plus basis (also known as time and materials) rather than a fixed-price (or bid or contract) job. Cost-plus “allows more flexibility for cost increases and can provide more allowances to clients, giving them the opportunity to have more control over their budget,” Segerson says.
To share with your clients: Construction Contracts: What to Know About Estimates vs. Bids
5. Balance Passing on Costs With Building Your Business
Of course, there are some costs you simply must pass along to consumers to stay solvent as a business. One remodeler we spoke with said that’s precisely what he’s doing, since he simply doesn’t buy enough to purchase in bulk in order to help cut costs and maintain profit margins.
Other firms have absorbed at least a portion of the rising product costs. “Unfortunately, rising material costs have dug into profitability and have forced us to increase our prices,” Segerson says. “In an effort to stay competitive and provide the best possible value to our clients, we have lowered our fee to share some of the cost increases with our clients.”
How much cost to pass on to the client is a strategic business decision each firm has to face. “There’s no doubt about it: We are working way harder for less profit than we did a year ago,” Medrzycki says. But he sees little choice, given client expectations and market conditions. “We’re not looking at tomorrow’s paycheck, we’re looking at the company’s reputation.”
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Of course, there are some costs you simply must pass along to consumers to stay solvent as a business. One remodeler we spoke with said that’s precisely what he’s doing, since he simply doesn’t buy enough to purchase in bulk in order to help cut costs and maintain profit margins.
Other firms have absorbed at least a portion of the rising product costs. “Unfortunately, rising material costs have dug into profitability and have forced us to increase our prices,” Segerson says. “In an effort to stay competitive and provide the best possible value to our clients, we have lowered our fee to share some of the cost increases with our clients.”
How much cost to pass on to the client is a strategic business decision each firm has to face. “There’s no doubt about it: We are working way harder for less profit than we did a year ago,” Medrzycki says. But he sees little choice, given client expectations and market conditions. “We’re not looking at tomorrow’s paycheck, we’re looking at the company’s reputation.”
More for Pros on Houzz
Read more stories for pros
Browse millions of photos for inspiration
Talk with your peers in the Pro-to-Pro discussions
Join the Houzz Trade Program
Before diving in to strategies for dealing with cost increases, let’s quickly look at what businesses in the trenches are facing. “We have noticed substantial material costs increases over the last two years on a variety of building products,” says Conlan Segerson, who does estimating and job financials for custom home-building firm Tallman Segerson Builders in Fairfield, Conn. “The popularity of cedar along with the high tariff on Canadian softwood lumber in 2017 has led to price increases.”
Additionally, prices for engineered quartz stone slabs used in countertops and vanities have risen 20% to 40% in the last two years, Segerson says. The cost of structural steel rose more than 20% during the same period thanks to an import tariff on steel, plus some additional rising costs for labor from the firm’s local steel company. The steel increase combined with a 16% price increase for concrete “caused our foundation costs to rise over 30% in the last two years,” Segerson says. (Though the tariffs on steel have since been lifted for Mexico and Canada, Segerson hasn’t seen steel prices drop in his area.)
A number of factors are contributing to the current situation — from import tariffs to demand for popular products to simply regularly scheduled price increases. “Most high-end appliances have an annual price increase of about 5% to 7%,” Segerson says.
Even the specter of tariffs can quickly lead to price increases, notes Machi Medrzycki, owner of MLM in New Orleans. As soon as there was talk of tariffs on Canadian softwood back in 2017, the price of this lumber “went up right away,” Medrzycki says. Last year the National Association of Home Builders estimated that rising prices of lumber had added $9,000 to the price of a typical new home in the U.S.
While any residential remodeling firm can be affected, it’s the ones that build (78% of builders or contractors, 75% of specialty building and renovation firms and 72% of design-build firms) that most commonly report that product and materials cost increases are contributing to their business costs, the Houzz study found.
Fortunately, there are steps businesses can take to help offset these widespread rising costs.