Passing the Buck of Increasing Costs

Contrary to popular opinion, Adam Smith didn’t coin the term, “supply and demand.” Yes, he popularized it in his landmark 1776 book, The Wealth of Nations, but Smith had picked up this now-famous phrase from another book on economics published nine years earlier, in 1767, by James Denham-Steuart, whom history does not recall anywhere near so well. 

Small matter. The phrase gained currency because it’s such an easy way to grasp the underlying mechanics of prices and pricing at any economic level. There are lots of ways to talk about the economic model of supply and demand, but its first basic law, literally (this from Wikipedia) is that “if demand increases … and supply remains unchanged … [then] a shortage occurs, leading to a higher equilibrium price.” Essentially, it comes down to this: The price of specific goods or services will increase as more people want them, especially if quantity is fixed or in any other way limited. Availability drives price.

Construction Costs Up

That principle may be what’s behind the sudden increase in both construction costs and construction materials noted earlier this year in the Wall Street Journal blog Developments.

The Journal quotes the multi-billion dollar Minneapolis-based commercial construction company Mortenson as “advising customers to budget 5% to 7% cost increases” in 2015. Construction costs haven’t been rising as fast as they were before the bust (that is, 2008 and the market crash and bank failures), but “we could be at 2006-07 numbers by the end of this year,” the site quotes Mortenson’s vice president of estimating Greg Clark as saying. ABC—Associated Builders and Contractors—which tracks construction costs state by state and provides economic updates, stated on April 14 that in the month of March prices for inputs to construction industries (read: construction materials), saw the largest monthly increase in more than two years.”

Up, Up, Up

So what does that mean when it comes to the cost of the products that go into a roofing, siding, windows, gutter, or other home improvement/exterior construction job? They’re rising, no question. And lest anyone think it's because building materials distributors are arbitrarily raising prices, West End Roofing Siding & Windows, an Oklahoma-based supplier with locations throughout the South Central states, posted the various “2015 Price Increase Announcements” the company had received from vendors on a page on its site so that contractors can see for themselves why they are being charged more. The site publishes a letter dated March 1 from Kirk R. Villar, vice president of sales and marketing for Atlas Roofing’s roof shingles and underlayment division, saying “Atlas is announcing a price increase of 5-7% [on] all shingle and roll good products” effective May 1, 2015, and urged supply houses to place their orders immediately to avoid paying those increases. Atlas is one of 19 manufacturers whose letters announcing 2015 price increases are posted in downloadable PDF form on their websites. Others include Wasco Skylights (up 3 percent), Viwinco Windows (4 percent across the board), GAF (5 percent to 7 percent on all steep slope roofing, effective May 4, 2015) etc., etc., etc.

West End Roofing isn’t the only supplier to point to vendors as the originating source of product price increases. Allied Building Products, a major supplier, regularly posts vendor price increase notifications on its website, as they occur. Wimsatt Building Materials, a Michigan and Ohio distributor, consolidated the information on manufacturer price increases ranging from 3 percent (Berger Bros. Co., a maker of gutters and accessories) to 12 percent (for Pactlv Corp., a maker of insulation board) onto a single page on its site, indicating that the listed increases “do not represent price increases for Wimsatt customers.” Though just how the supplier will absorb these price increases without passing them on to contractor customers is a puzzler.

Turning Higher Prices Into a Marketing Opportunity

Home improvement contractors price jobs at a wide range of margins, depending on overhead structure and local competitive conditions. But few are generating the kind of gross profit that could absorb 3 percent to 12 percent materials increases without adjusting direct job costs and overall business expenses. And none would be in business long if they did. Some roofing/siding/window companies see a marketing opportunity in it. A New Jersey roofing and siding company, Emmons Construction, posts those supplier letters on its website explaining that “occasionally manufacturers and suppliers must increase their prices. Unfortunately, when that happens we must adjust our prices accordingly.“ The company advises website visitors that “If you are planning to get work done to your home, schedule before the effective dates below so we can try to lock you in at the lower rates.” Another company, Chicago-area Window Concepts, also turned price increases into a marketing and sales opportunity by promising the “biggest offer of the year” on its new website, a “complete price freeze on new windows, doors, siding and roofing for one full year.” PR

Costs of construction materials, and of construction itself, are going up. Contractors and their suppliers adjust.