Despite cost increases in his market, Craig Denman’s clients are not walking away or cutting back. “People who decide to spend $3 million on their vacation home in Whitefish, Mont., really don’t have a problem with finances,” he says. “They say, ‘There’s nothing we can do about it, we want it, and we’re willing to pay for it.’” But Denman, too, is struggling with price spikes. “The volatility is just incredible, across the board,” he says, and that makes writing a contract a high-risk proposition. “Like most people, we’re adding a clause to our contract saying that we can’t guarantee it.” But many clients have resisted. As an alternative, Denman has begun breaking jobs down into three sequential contracts covering concrete and foundation, framing and mechanical systems, and interior finishes, respectively. With this approach, he says, “The project may last more than a year, but we’re able to purchase [materials] no more than a month after we write our contract.”
In Charles Garrett’s Vero Beach, Fla., market, costs are rising rapidly enough that he can clock the increase in his square-foot costs almost month by month. “Up to the fall we were talking $325 to $350 a square foot. Now we’re looking at $400, $425. We’re saying we think it’s going to be $450, $475.” Rising commodity costs seem to be the major culprit. “Drywall, roofing materials, copper … I bet I get three letters a week from some source saying we’re going up 10 percent in two weeks.” Surging local demand for materials has added to the problem. “Our area has seen an eruption of production builders,” Garrett says. “Those guys can call and order a whole truckload. We don’t know what we’re going to use until we need it. We’re not in a position to stockpile materials.” As a result, he says, “Shortages of materials have become a problem for us too. We’ve actually had concrete block delivered on a flatbed truck from Georgia.” Fuel-cost surcharges are starting to appear, as well. Garrett’s concrete supplier still delivers for free, he says, at least for the first load. “But as soon as we order a finish-up truck, it’s $75.”
“What we understand may be coming to the market is escalator clauses [from subcontractors],” Garrett says. But he sees no potential for following suit. “I don’t know a single one of our clients who would sign a contract like that.” Instead, Garrett does his best to buy ahead. On one recent project, he purchased his roofing material 7 months in advance and arranged for his roofer (after verifying the roofer’s insurance coverage) to store it until installation, saving 30 percent of the current cost. He also stays in touch with appliance manufacturers, who notify him of upcoming product changes—and likely price increases—so his clients can choose to buy in advance from current models. Of course, “If they come out with a fancier model and you want that model, you’re out of luck.” But while such efforts can remove some of the guesswork from the estimating process, Garrett says, “It adds another layer of just busyness.” And the fact remains: “Quoting a price nine months to a year from now is not easy to do.”
That’s why Dave Reese bids projects only when he has to. “We’re going more to a cost-plus kind of contract if we possibly can,” says Reese, whose Scottsdale, Ariz., market has been buffeted by price increases. Last year, he says, “We saw increases in just about everything.” This year, he says, “Lumber seems to have stabilized, but we’re still seeing concrete costs going up.” Reese has 18 houses currently under construction, at an average budget of more than $2 million. But, like other custom builders, “We’re not able to tighten up these costs by volume. I’m not able to go down to the lumberyard and tell them I’m going to buy $10 million of lumber and lock in our lumber cost for eight months.”
Short of taking on the risk himself, the best Reese can do is apprise his clients of the recent history of cost increases, advise them to build a contingency fund into their construction loan, and sympathize. “When these design projects go six to 12 months and the costs go up 12 to 14 percent, it’s frustrating to see the customers go through the pain and suffering of these price adjustments—$100,000 to $200,000 in our category. We haven’t lost any jobs, but there have been a couple where it’s really been painful for the clients.” In the last year, Reese saw the cost of one copper roof rise from $84,000 to $120,000. “That’s really ugly,” he says. Not as ugly, of course, as if he had based a bid on the lower price and had to eat the difference.
