Hurricane Katrina reminded contractors that price increases — sudden, unavoidable, and steep — could easily be brought on by product shortages arising from a natural disaster. And with the price of vinyl, asphalt, and other materials associated with exterior remodeling projects rising, no specialty contractor anywhere escaped rising product costs in 2005.
Beware of Profit Slippage Seasoned contractors point to the need to respond quickly when prices jump, whatever the reason. “The longer the lag time, the more profit slippage you have,” says Tom Capizzi, president of Capizzi Home Improvement, in Cotuit, Mass. “If it takes three months [to respond to price increases for materials], you can't recoup that.”
He and others point out that rapid adjustment is critical to your bottom line. “As soon as we get a price increase, we immediately change our price list to reflect the new costs,” says Ralph Feurer, owner of Norton's Quality Exteriors, Midvale, Utah. Norton's calculates proposals in an Excel spreadsheet, taking the new costs and factoring in the margin to arrive at the new selling price. Those calculations apply to everything from siding and roofing materials to nails and caulk.
“A lot of companies are taking a big beating,” Capizzi says, because they aren't increasing their prices fast enough and are afraid to add a markup to higher costs.
Possible Solutions Gold Seal Roofing and Construction in Tampa, Fla., protects itself by limiting the number of days its proposals are valid. Each contract spells out the number of days before the company may withdraw its proposal for work, says general manager Nick Nicholson. For commercial jobs, Gold Seal specifies that the bid is based on today's pricing and may change with price increases in materials.
Though it's more typical in design/build remodeling, another helpful tool is the escalation clause, which builds into the sales contract automatic increases linked to costs.
But industry consultant (and REPLACEMENT CONTRACTOR columnist) Richard Kaller advises contractors to avoid using the escalation clause to, in his words, “hammer the customer to death.” Instead, Kaller says, “prove the need for the higher price to him with real-world documentation.”
Power of Choice Kaller also suggests that contractors always make sure customers feel they have a choice when prices go up. The former roofing contractor says he would even offer to let clients call distributors to check prices. It's important to present price increases in person, Kaller adds, rather than in a letter. That makes it harder for the homeowner to say no.
Anticipating those increases helps. Large quantity orders from supply houses can sometimes lock in a price for 60 to 90 days, Nicholson points out. Another option is to maintain a relationship with more than one supplier, Feurer says. That, he says, gives him “the pulse of the market.”