Let’s talk about something that affects all of us in the industry: the prices of materials. Have you ever noticed that the price of wood and other materials can go up like crazy one day, and then drop just as quickly the next? It can be frustrating, but there are reasons behind it that we should understand.
Firstly, let’s talk about why prices can increase so dramatically. One of the biggest factors is supply and demand. When there is a high demand for a material, but the supply is limited, the price will naturally go up. This can happen for a variety of reasons, such as natural disasters that disrupt production or transportation, or an unexpected surge in demand due to a sudden increase in construction projects.
Another factor is the cost of production. If the cost of producing a material goes up, the price will also increase to reflect this. For example, if the cost of harvesting and processing wood increases due to rising wages or fuel prices, the price of the finished product will have to increase as well to make up for these costs.
Additionally, tariffs and trade restrictions can also affect the price of materials. If the government imposes tariffs on imported materials, the cost of those materials will go up, which can lead to an increase in the price of domestic materials as well.
Now, let’s talk about why prices can decrease rapidly. One reason is simply that the supply catches up with the demand. If there was a shortage of a material that caused the price to go up, but then the production and distribution channels catch up, the price will naturally drop as the market stabilizes.
Another reason for price decreases is changes in market conditions. For example, if there is a sudden decrease in demand for a material, the price will drop to encourage buyers to purchase it. Similarly, if the cost of production goes down due to lower fuel prices or more efficient production methods, the price of the finished product can also drop.
An excellent example of this whole thing is the price of lumber during the pandemic. When the pandemic hit, there was a sudden surge in demand for lumber as many people began investing in home renovations and DIY projects. Many people were told to stay home, so they had to something! However, at the same time, there was a shortage of lumber due to several factors.
Firstly, many lumber mills had shut down or reduced their production in anticipation of a slowdown in demand due to the pandemic. Additionally, the pandemic caused a shortage of labor in the forestry industry as workers were unable to come to work due to quarantine measures and travel restrictions.
Furthermore, there were transportation and logistical challenges as well. Shipping companies had reduced capacity due to COVID-19 regulations, and this caused delays in shipping and increased transportation costs. Moreover, with many border restrictions and quarantine measures in place, trade between countries was also affected, which led to disruptions in supply chains.
All of these factors – increased demand, reduced production, shortage of labor, transportation challenges, and disruptions in supply chains – contributed to the increase in lumber prices. The prices rose so dramatically that they reached all-time highs in May 2021, with prices increasing more than 300% in some cases.
However, as the industry adjusted to the new market conditions, the prices began to stabilize, and in late 2021 and early 2022, they began to drop back down to pre-pandemic levels. This is an example of how market forces can cause prices to increase dramatically due to sudden changes in demand and supply, but then stabilize and even decrease once the market adjusts to the new conditions.
In general, materials costs are high right now. Undercharging for materials can absolutely kill your profit on a job. For that reason, it is CRITICAL that you stay on top of current materials prices. If materials prices rise rapidly but you are using older, lower prices in your bid, you will underbid. You may also be able to put contengencies in your bids to account for rapidly rising costs.
Having good relationships with your suppliers is also a great idea. If you are a good customer for a supplier and REALLY need a better price, you may be able to get it. Take your suppliers out to a good dinner. Treat them well.
ProfitDig makes it easy to track your materials costs. The system will even remind you if it has been a while since you have updated your material costs. You need to call your suppliers regulalry and make sure your bidding system is set up with proper materials prices. Don’t take chances! Create professional quality job bids and track your costs on a line item basis with ProfitDig. Try it out today.