A few months into 2020, we started seeing the effects a pandemic can have on our economy. People were locked down at home. Many used this time to catch up on projects—like home renovations, remodels and new construction builds. Unfortunately, workers were also on lockdown. So, while demand for lumber was there, sawmills struggled to keep up with the new demand.
The price of lumber rose from $303.40 per thousand board feet to a record $1,607.50 in May of 2021. But finally, prices are starting to drop. At the end of June, they were down to $783 per thousand board feet.
It will take time to return to pre-pandemic pricing, but this continued drop is a much-needed reprieve for home services professionals.
“Sawmills appear to be catching up with the rampant homebuilding demand in North America that fueled a months-long rally, bringing some relief to a market beset by supply shortages and price surges.” – Bloomberg
In this article, we’re going to explore things you can do as a home services professional to mitigate future lumber price fluctuation. The lumber market may be stable for now, but if we’ve learned anything in the past year it’s how quickly that can change.
Here’s what you can do to prepare for the unknown.
Prepping For Future Lumber Cost Surges
With lumber costs showing so much volatility, home builders, remodelers, renovators and contractors need to look for ways to prepare and streamline. If the stability of your company depends on low lumber costs, you’re in trouble.
Flexibility and agility, on the other hand, can give you a very real leg up. You’ll be able to roll with the punches while your competition scrambles to make ends meet.
Below are a few strategies for moving away from a cost-dependent business model. Some of these will fit your business. Some won’t. That’s okay.
Use what you can, tweak what you like, and scrap the rest.
The core idea here is a simple one. Take steps now, while the lumber market is somewhat stable, to prep for the next price surge. Doing so will protect you, your business, and your employees.
Lock Down Prices
One way to minimize the effects of price surges is to lock in pricing with your lumberyard ahead of time. Some suppliers will let you do this by simply getting job quotes for the needed materials ahead of time.
Not only does this have the potential to lock in your lumber costs, but you can also provide a profitable quote to your customer.
If your lumber supplier doesn’t guarantee prices provided in quotes, you might still want to discuss options with them. Anything you can do to protect yourself from rising costs at the supply level will be helpful.
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If you’re currently using a single supplier for all your lumber, you’re operating at a severe disadvantage. Sure, there’s something to be said for loyalty. But there’s something to be said for options, too.
Consider expanding to at least two-three suppliers.
While lumber costs are more or less level, spread your supply needs over all of them. Then, when the price peaks or drops, you can shop around and utilize an existing relationship for the best possible price.
Revisit Your Contract Structure
While customers will almost always favor a fixed-price contract, this model doesn’t always benefit you, the home services professional. If you provide a quote, guaranteeing a price, and the cost of lumber spikes the following week, you could lose money on that project.
You may want to consider a cost-plus option, instead.
Certain elements of the contract will remain fixed, like the cost of labor. And you can provide the customer an estimate of supply costs based on current lumber prices. But the final price for the project will be determined by the actual cost of supplies—whether that price goes up or down.
Transparency is a core business concept, and it certainly applies here.
For example, never underbid a project just to get in the door. Customers will not be impressed by a sudden increase in their bill.
Instead, take the time to educate potential customers. Explain how the volatile lumber market is affecting your costs. They may not like the fact that this also affects their costs, but you’re running a business. You need to be profitable.
In the end, your most reasonable, loyal customers will appreciate the honesty.
Diversify Your Business
Finally, you might consider diversification.
Are there other opportunities available to you as a contractor? Can you explore remodeling options that don’t require specific materials? Or focus your marketing efforts on renovation projects that don’t depend on lumber?
Changes in the lumber market could open up new opportunities for you—if you’re looking for them.
Flexibility will always be important when running a business. That’s especially true for home builders, remodelers, renovators and contractors.
The key to thriving in a changing market is to adapt and evolve.
In this article, we’ve covered several ways you can do just that. In fact, some of these tips are immediately actionable. We encourage you to think about what you’re comfortable doing today to get started.
- Maybe call a new supplier or two.
- Or take a look at your current contract and consider a cost-plus model.
- Or even take the time to fully explain your costs to the next customer you quote.
Small changes like these will go a long way to protecting your business the next time the lumber market spikes.