Despite a recovering economy and other positive economic indicators like continually low interest rates, now is not the easiest time to be a remodeler. Several factors are contributing to job pricing volatility, making life difficult for contractors already struggling to sell prices to homeowners who are often unprepared for what their project is going to cost.
Material prices are a huge factor. According to data from Random Lengths, prices for structural composite panels more than doubled from May 2003 to May 2004, and although they've dropped significantly since then, the end-of-July rate of $397 per thousand square feet is still high. Framing lumber prices have gone up by 41% in the past year. And according to data from World Steel Dynamics, structural steel prices are up nearly 70%.
Remodelers in many parts of the country are also having to cope with a cement shortage. According to a mid-year report posted on the Portland Cement Association's Web site, 23 states — which accounted for 48% of cement use in 2003 — are reporting shortages, while most of the rest of the country has a tight, though ample, supply. According to the PCA, a national trade association, the shortage is due partly to the recovering domestic economy and partly to economic growth in China, which has limited the availability of ships used to import cement to the United States.
Insurance and labor continue to be problematic for remodelers, too. Most contractors are facing drastically increased prices for general liability insurance; there are reports in some areas that it's impossible to find underwriters for such policies, no matter the price. “I tell my clients [about insurance costs], and they can't believe it,” says Michael McCutcheon, of McCutcheon Construction, in Berkeley, Calif. “They think I've slipped a digit.”
Due, in part at least, to these rising costs of doing business, subcontractor pricing has also been particularly volatile, at least for certain trades in certain markets. Kirk Van Camp, chief estimator at Mark IV Builders, in Cabin John, Md., reports that the electricians he uses have raised their rates by 60% since the beginning of the year, as have his masonry tradesmen. He adds that plumbing contractors, in general, have also increased their prices steadily.
Therefore, contractors should be careful about quoting prices, and above all else, they should believe the numbers when they get them, no matter how high they may seem. “We were using $100 per square foot as a base price for an addition for a long time,” says Mark Scott, owner of Mark IV. “Now, our base is $250, and it's gone up at least $50 since the first of the year. We have to be honest with ourselves: The numbers really have gone up that much.” Jeff Rainey, owner of Home Equity Builders, in Great Falls, Va., adds, “I'm looking at these numbers and I'm shocked.”
There are other measures that remodelers can take to avoid being burned by all this volatility. Rainey has cut the time period for which he guarantees his quoted price to 15 days, down from 30. Scott is making sure that his projects stay on the company's standard fast-track building schedule. Contracts can include escalation clauses that make provisions for sudden jumps in material costs. Field employees should not quote prices on change orders without verifying them with the office first.
But most important, remodelers have to deflect as much of the risk as possible away from themselves. “[Increased costs] shouldn't be killing you,” says Shawn McCadden, a 17-year industry veteran who sold his remodeling business in May and took a position with franchiser DreamMaker Bath & Kitchen. “They should be killing the homeowner.”