Happy New Year from Flatwater Homes!
The first half of 2021 was full of volatility in terms of supply, cost of materials and labor, alike.
Then in AUG, pricing appeared to ‘normalize’ and though supplies remained tight, costs were dropping.
However, in the last several weeks the cost of lumber has spiked again with lumber futures closing at $1,137 today (12/30) as compared to averages in the $300 to $500 range in years past.
The link below from Fortune.com does a respectable job explaining why these costs have spiked for a second time in a year and gives a glimpse at what the future might hold into 2022.
Fortune believes the harsh spikes of 2021 may be done, but demand for building products coupled with a lack of skilled crafts persons (labor) will continue to keep construction costs high.
The Q4 2021 North American Construction Outlook from FMI predicts a similar uptick in demand for residential construction in its latest forecast with a CAGR more than 6.5% from 2020 through 2025.
See link below for complete forecast: https://fmicorp.com/insights/construction-outlook/2021-north-american-engineering-and-construction-outlook-fourth-quarter.
To put this into perspective, the weekly market update from Drexel does a good job at showing how a typical framing package 2 years ago for a 2k sqft home cost around $20k as compared to today where the same lumber package might cost about $55k.
The FWH team collaborates with trade and design professionals to deliver exemplary homes. So, the cost of a framing package is rarely a primary driver in our projects. However, lumber costs are a harbinger of an increase in all project costs throughout the supply chain in the delivery of high-end homes and there is little we can do to directly control this trend.
But there is something we/ Builders can do to improve these increasing costs for our clients...
COMMUNICATE. This goes beyond making phone calls. How are budgets & schedules, built and managed? Where, when and what should clients be aware of in the building process? Should trade and design partners alter their traditional roles and relationships as we build? “Sunlight is said to be the best of disinfectants” Louis Brandeis, 1913. We need to come together as a holistic team, dedicated to delivering our clients’ dreams – safely and ethically and at the highest possible quality. This means sharing ideas, techniques, costs, opportunities and challenges across the board. We need to not just rely on casual conversations, but document them and hold ourselves accountable - first – before all others. We need to share information openly, as we look to better the project and deliver to higher standards. It is very rare in the construction industry where we face a challenge which has not been conquered before. All of us need to continue to collect and share our ideas as we work to make data driven decisions to control costs and deliver excellence.
HAVE A SENSE OF URGENCY. A common theme in our industry is a delay in action. It happens at least once a week where a client or other project team member decides to order a product and this order is then communicated across the trades accordingly. However, for whatever reason the item or decision goes unprocessed/unordered for a week or sometimes more. This may not have an immediate cost impact, but it increases the duration of the job which in turn drives higher costs across general conditions – at a minimum. A single extra month for the site toilet is only $150, but compound this across the whole project and general conditions get expensive - quickly. Sure, the door package order is delayed 4 weeks, but the cost of the doors hasn’t changed – so why is this a problem? A 4 week delay in door delivery not only impacts the trim carpenters, but can also affect the drywall, electrical, tile, plumbers, paint/finish and HVAC teams. This small delay causes the other team members to delay or alter other projects they are working on which further increases the ‘frictional’ costs of their work to other clients in addition to the job they are working with us on. The client ultimately pays for all of this ’friction’. How? A 4-week delay results in crunch time which drives ‘trade stacking’ which results in damage to finished surfaces, inferior quality in workmanship, inattention to safety and ultimately rework which is often further hidden from the client. Forgetting to place an order or getting something done ‘when you get around to it’ can have a material impact upon many people – not just the schedule - which can result in higher construction costs and at worse, unethical project delivery.
DELIVER BEST BUSINESS PRACTICES. Communicating with data and working with a sense of urgency are critical business practices; common behaviors of high-performing teams; and these are FREE. When married with common project management tools such as document controls, budgeting, forecasting, scheduling, weekly look a-heads, purchase orders, RFIs, submittals, clear subcontracts, alternative products/materials, etc.…then excellence begins to emerge. Common project management tools used by a high performing team is critical to managing volatile costs for our clients.
Where can our Clients help in controlling their projects?
Ideas to consider:
FIRST MOVER ADVANTAGE. Get your whole team sorted out in advance. Whether you use Flatwater Homes or not – getting a contractor you truly trust, on board and working hand-in-glove with the architect and designer is critical. The team should be willing to go through a collaborative pricing/estimation exercise and share data openly. If there are key trade professionals, design elements or materials get those on the table at the beginning and make sure your vision is understood by all. A big cost adder to any project is scope creep and when one or more parties is not on the same page at the start – creep begins.
HAVE A PLAN "B". This is not just choosing between a grey roof and a black roof when the material is delayed. This is about either knowing what you value or discovering what you value by working with your team (architect, designer, and contractor) and knowing/learning how your values impact your budget. The copper standing seam metal roof looks amazing and costs $200k. The architectural composite roof might be $60k. Yes, there are significant differences in longevity and design but maybe you value a master suite/spa more than a roof? So, maybe you decide with your team to go with the $60k roof and use the balance in your home spa? But did you go through a data driven process to make this decision? Did the team do a cost benefit analysis for you? A copper roof will last well over 100 years if installed correctly. In that period, you may need to reroof your composite roof 3 or 4 times at a cost of at least $60k/roof. Will your family stay in the home 100 years? Will you sell the house in 10years> What is the design value vs the performance/longevity value for this home? What is your cost of capital? Lots of questions to consider and rarely a crystal-clear answer. This process of Plan B discovery is often referred to as ‘value engineering’ and can only be done by working as a team and going through a comprehensive design and open book estimation process. All projects and all clients have a budget. There is no such thing as unlimited. The budget needs to be known, contingency the client controls should be clear, and the team should work within these guardrails. Things will change but having a Plan B will give the client a better chance of control.
TIMING. Some of the recipients of this mail are highly successful investors. If you ask them about how best to ‘time the market’ you will likely get a good laugh. If you want to build, then build. Just make sure your team has a sense of urgency and a clear understanding of your vision and budget (back to #2 above). If the lumber package is $300k or the foundation is $100k and you know you want the home, then get a PO and subcontract put in place which locks in the numbers. This may require deposits and other similar tools but waiting for that lumber package to drop to $290k may never come. If you wait and the lumber package does drop to $290k, know the other 1,000 odd components going into your home, including skilled craft availability are continuing to increase in both cost & scarcity.
The building supply chain will remain volatile and according to FMI, demand is not going to drop anytime soon. Certainly, prices will drop in the months ahead, but the trendline will continue to climb. Projects will go on ‘hold’ or get cancelled and exogenous shocks like COVID will continue to test us all.
However, the FWH team commits to all of you to do better every day to communicate, act with a sense of urgency and practice what we preach as we work as your team member to deliver excellence to all our clients in 2022 and beyond.
We look forward to continuing to learn from all of you as we embark on a challenging and stimulating 2022!
Respectfully,
Joel, Jenna, Adam, Chris and Matt