The buzz around a lot of projects lately has been about the shortage of lumber we’re experiencing. Materials that used to be plentiful on the racks of material yards everywhere are taking weeks. And they’re only coming if you pre-order them. The lumber shortage in particular has hit construction projects pretty hard. If you’re like so many other contractors, you want to know what caused the shortage, and what to do if it affects your payments.
The impact of a material shortage
While material delays are common on custom builds, they’re far less common when it comes to basic framing lumber. This is the first time that many contractors have been unable to get basic materials.
And when supply is down, prices inevitably rise. According to one estimate, the lumber shortage is adding $14,000 to the cost of home construction.
What caused the lumber shortage?
The lumber shortage is fairly widespread by now, and it has a lot of people asking what happened. Most job sites have slowed down at the very least, with some seeing significant delays. The question is: Why is there a shortage of lumber now?
Home construction is going strong
The shortage in material came on the heels of one of the most dramatic slowdowns in the history of the construction industry. When contractors were finally able to get back to work, they found a ton of projects for the taking. They began signing contracts and lining up materials, only to find themselves in the middle of a significant lumber shortage.
This was particularly true in the residential construction sector, which is perhaps the only bright spot in the industry. According to Census Bureau data, which tracks building permits and starts on a monthly basis, residential construction in July jumped almost 20% from June, and nearly 10% over July 2019.
Home renovations are also up, as property owners rushed to retrofit their houses with more comfortable home offices or study-from-home spaces. Deck builders have seen business boom across the country.
Lumber Mills Shut Downs
The reality is that the COVID-19 shut down hit the industry in ways unexpected. As social distancing became a requirement, many non-essential workplaces closed their doors while the virus spread across the country. This shutdown included lumber mills throughout the US, which caused a drop in lumber production.
But, it wasn’t just American lumber mills shutting down. The majority of American lumber comes from Canada, which experienced the same social distancing and work reduction as the US. We also get a lot of our lumber from countries like China and Germany—two of the countries hit hardest by COVID-19.
When you add up all of these factors, it’s not hard to see why there may be fewer materials available for contractors since work has ramped back up. However, fledgling lumber production isn’t the only reason for the shortage.
DIY Projects Are Up
Americans weren’t just sitting home and shutting their blinds during the COVID-19 shutdowns. Many homeowners took it as an opportunity to tackle some projects they’d been putting off.
Most home improvement and hardware stores, as well as lumber yards, were able to stay open. Homeowners were lining the parking lots with half-ton pickups and loading them full of framing lumber, pressure-treated wood, and other materials. It was the perfect time to start tackling projects on the home front.
Combined with the reduced mill production, the DIY-craze created a perfect storm of scenarios that developed into a major lumber shortage. It can be next to impossible to find enough of the most common materials to complete a project.
How to Get Paid During a Lumber Shortage
You can’t make a forest grow fast enough to end a lumber shortage. The lumber mills have to ramp production back up to increase the supply, which is unpredictable at best. DIYers will have to go back to their office jobs to reduce the demand. Without striking that balance, it’ll be hard to end the shortage.
There are a few ways that you can get paid during a lumber shortage, however. They might require some creative thinking or adopting new policies. If 2020 has taught the construction industry anything, it’s that we should be as flexible as possible.
1. Protect your pricing ahead of time
With a supply shortage comes price inflation, and inflation can destroy your profit margin. The laws of supply and demand rule pricing and jobs with healthy margins may no longer be profitable.
One way to protect your profit on a project is to get a job quote for materials. You might need to special order your lumber to do so, but you can lock in your prices. You’ll know what you’re paying ahead of time, allowing you to provide an accurate and profitable quote to your customer.
While job quotes don’t always ensure the best price, they do provide some stability for your pricing.
2. Try a different material
If you’re lucky enough to find the lumber you need, the price will likely be through the roof. The cost of available lumber has risen as much as 60 percent. At that price, Doug Fir and pressure-treated wood might be as expensive as many other wood species.
If your company builds outdoor structures, it might be worth checking into other materials to offer your customers. With inflation, you may find redwood or cedar to be relatively affordable alternatives. They may also be much easier to get your hands on.
Customers may balk at the increased job cost initially. But the reality is that pressure-treated just isn’t available right now, and they’ll have to deal with it and the increased cost of their project.
3. Open up an account with new suppliers
Back in April, we suggested taking the shutdown as a time to trim the fat and prepare for the boom. In that article, we recommended taking a look at your current accounts and possibly opening new credit lines.
If you’re only operating through one material supplier, you’re at a serious disadvantage. This may be the time to open up another account or two with some additional suppliers. Not only will you gain access to more lumber, but if other materials run short, you’ll be in a better position overall.
4. Change your contract structure
Most contractors are comfortable with fixed-price contracts. Let’s not pretend that they don’t benefit contractors a bit, allowing them a little extra profit and mark-up on materials. Right now, however, might be a good time to expand your contract repertoire to include different types of contracts that give you more protection.
Consider adopting Cost Plus or Time and Materials contracts for the time being. They might be some of the best ways to ensure your business stays profitable during the shortage.
Admittedly, they may be more transparent than most contractors are comfortable with. But they will help you avoid losing your shirt when material prices jump overnight.
What to do if a shortage is causing payment delays
If you’re already into a project and your material source dries up, you may find yourself waiting to get paid. While some force majeure clauses (often known as “Act of God” clauses) may have provided a bit of protection regarding your deadlines during COVID-19 shutdowns, it’s unlikely to help you with this shortage. You need to get paid for the work you’ve completed thus far.
If your contract doesn’t include an escalation clause, see if you can negotiate one. The property owner or GC doesn’t want a price increase forcing you out of business in the middle of a project. And put that clause into all of your future projects.
If you’re scrambling to find the materials you need to finish the job at a fair price, you shouldn’t have to wait for your payments because the project stalled. You have the right to get paid for the improvements you’ve made to the property.
Open the lines of communication and request a change order
Open communication can play a huge role in how well quickly you recover your payment. For any changes that might come up, consider requesting a change order. A change order can help protect your payment if you end up in a payment dispute. While it’s great that parties are working together towards a solution, change orders are extra insurance. Reasons for a change order may include:
- A change in materials
- A new time schedule
- Job price increase
Send a meticulous pay app
If the materials shortage has extended your deadline, and you need to get paid for work you’ve already done, you need to send a pay application. This payment application should be meticulous, and you can only bill for the work you’ve completed or the materials that you’ve supplied.
If you’re not “due” for a progress payment, the GC might not be expecting this pay app. Make sure it’s on-point to avoid any pushback.
Send the appropriate notices
Since you should be sending preliminary notices on all of your projects, the property owner and GC are aware you’re on the site. They’re also aware that you’re prepared to protect your payments for the work you’ve completed. Hopefully, they both realize that you know your rights, and this friendly document will help ensure you receive timely payment.
If the owner or GC are blaming the payment delay on your lack of progress, you might have to take a firm stance. Sending a demand letter might be effective in convincing them that it’s time to pay you. You’re requesting payment for work you already completed before the shortage’s affects. This demand letter will make that clear.
Sending a notice of intent to lien, on the other hand, tells them that you’re serious and willing to put a lien on the property. If they’re unwilling to pay you for the part of the project you’ve already completed, a notice of intent can be the warning shot before you file a lien.
File a mechanics lien
If you’re still having a hard time getting paid for work you’ve already completed, filing a mechanics lien might be your best option. Take some time to learn how to file a mechanics lien, especially what the law requires in your state.
Filing a lien against the property will get you the attention you need to get paid for the project. It will also help speed up the payment, as the owner doesn’t want a lien on their property. A mechanics lien can be an extremely effective tool if you’re dealing with a material shortage-related payment delay.