The lumber crisis remains one of the biggest challenges across the construction industry. As 2020 ended, lumber prices across the country started to rise, hitting a peak in May 2021 at a record $1,690 per 1,000 board feet.
For contractors, renovators and builders, this high lumber price tag meant severe cost overruns for ongoing projects. In fact, 77% of home improvement projects that were started in 2021 ended up costing more than planned due to the lumber price spike.
But contractors can now breathe a sigh of relief. Despite erratic fluctuations throughout the year, lumber prices are now gradually declining, albeit with small dips and crests in the price curve.
In this article, we’ll discuss why lumber prices skyrocketed and the valuable lessons construction professionals can learn from the increase.
Why Did Lumber Prices Skyrocket?
There were several contributing factors that resulted in a mismatch between lumber demand and supply and a dramatic price spike. Here are some reasons that led to a rise in lumber demand and a drop in supply.
Booming Housing Market
The demand for housing skyrocketed in 2020 due to mortgage rates reaching record lows, construction financing falling, homeownership spiking among millennials and more city dwellers looking into low-cost housing markets in the suburbs.
Surge In DIY Home Improvements
Most Americans spent the better part of 2020 working from home. With extra time on their hands and stimulus checks coming in, many homeowners occupied themselves with DIY home repairs and remodels. This resulted in more home projects than originally forecasted by many suppliers.
Higher Demand for Wood
Consumer appetite for wood shot up across the board, not just in the construction industry. Most notably, a rebound in the U.S. manufacturing sector put pressure on metal and lumber supply chains. Even the manufacturers themselves felt the pinch from the lumber shortage. Such was the case at Northwest Hardwoods Inc. The company reported low margins on finished wood boards due to the rising costs of maple and oak logs.
Shrinking Supply Capacity
On top of the mounting demand for lumber across various commercial sectors, the lumber supply chain was in disarray. The COVID-19 pandemic disrupted lumber supply networks. Lumber production plummeted as many lumber mills, haulers and distributors shut down.
Lessons Learned From the Lumber Price Spike
Many contractors, builders and homeowners may quickly dismiss this lumber crisis as an isolated incident that couldn’t possibly recur. But that’s not true. Today, we’re dealing with lumber scarcity; tomorrow, we might be mourning over metal prices. We cannot prevent another shortage or price hike in construction materials. The best you can do as a contractor is to take lessons from one crisis and apply them to the next. What can you learn from this one?
Strategically Price Your Construction Services
Pricing professional construction, building, repair and remodeling services is a major headache for many contractors. Most builders go for either a fixed-cost or cost-plus pricing structure. But neither of these pricing models can sufficiently protect your project or profits from unexpected costs along the way.
What you need is a more flexible pricing method that won’t burden you with cost overruns. Ideally, adopt a pricing model that completely separates your net gains from the cost of goods. If that’s not possible, include a price escalation clause in the contractor agreement. This will allow you to justifiably adjust the price according to material costs at the time of purchase.
Strong Contractor-Supplier Relationships Are Essential
Don’t take your suppliers or supply lines for granted. Instead, turn your suppliers into strategic business partners by building solid relationships with them. Begin by choosing suppliers that align with your business objectives and values, and develop a mutually beneficial B2B partnership.
There is no way that any supplier would have sold lumber at normal prices during the shortage. But that’s not the point of a supplier partnership. A good supplier might have warned you well in advance about the price hike. Suppliers understand material supply chains better than anybody. Some insights into commodity demand and supply trends can help you prepare for the next crisis.
Allow Flexibility in Contractor Agreements
Be careful not to bind yourself to a contract that lets your business take the fall for time or cost overruns caused by unavoidable circumstances. The lumber price spike was no one’s fault. So, there is also no reason a client should blame a contractor for stalling a project or going over budget on account of the lumber issue.
Ensure all agreements get around external factors that might affect a project’s outcome, such as material costs, weather, changes in regulations and labor shortages. Let the client make the final decisions regarding unforeseen circumstances, whether to terminate or delay the project, revisit the agreement terms or resolve the problem altogether.
A Diverse Portfolio Can Save Your Business
Never put all your eggs in one basket. The construction market is vast and teeming with opportunities. Take advantage of multiple fields instead of limiting your business to just a single niche. If you are a home builder, double in renovations, building consultancy or home services too. A rich, diverse portfolio spreads out risks. This makes your business more resilient and agile, thanks to multiple independent revenue streams. If a disaster were to hit one facet of the business, the rest would still run normally.
When looking back, how do you think your business coped with the lumber price hike? Are there steps you could have taken to better prepare your business?
The lumber shortage has taught lessons to every person in the supply chain, emphasizing the need for planning for the unexpected and developing business agility. Take these lessons to build a plan in the event of future shortages that could halt your timeline affect your labor supply and affect your entire operation.
If you are looking for some help in applying these tactics, reach out to the Socius team.