To build or not to build? Build with relationships anchored in trust

Sep 02, 2021 | Herman Post


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“To build or not to build?” That’s the question so many are asking as they weigh pros and cons.

“To build or not to build?” That’s the question so many are asking as they weigh pros and cons.

 

For many farmers, fall is an ideal time for a building project. You close your eyes and imagine a new, state-of-the-art dairy barn, an indoor arena, some new equine stables, or perhaps a larger garage / storage facility. With interest rates at historic lows, the thought of upgrading your operation is tantalizing.

But this year has no shortage of uncertainty. These last 18 months have been unprecedented. Who knows what the next few months might hold, much less what awaits us in 2022?

“To build or not to build?” That’s the question many farmers are asking themselves as they weigh the pros and cons.

For what it’s worth, it's understandable to be on the "construction fence," so to speak. There are valid reasons for caution right now.

Volatility in the cost of building materials

Thanks to work stoppages and supply-chain disruptions during the early stages of the pandemic, lumber prices skyrocketed in 2021. One viral meme featured the caption, “The next time your wife asks you to take her someplace expensive” along with a picture of a well-dressed couple eating a fancy dinner in the lumber department of a big home improvements warehouse!

The meme is humorous. But the reality? Not so much. In March 2020, a 12’ length of 2x4 SPF cost $4.32. By the end of May 2021, that same stick of wood was selling for $15.96!

This shocking rise in the cost of wood (and other construction materials) left everyone wondering how much higher prices will go. As builders, we figured most farmers would “pull the plug” on their 2021 building plans. To be sure, some did. And yet, our phone has continued to ring off the hook.

With so much uncertainty in the cost of materials, construction companies started asking a similar question: To bid or not to bid?

Uncertainty in the bidding process

Due to the extreme volatility in the prices of construction materials, bidding on projects has become more nerve-wracking than ever. Here’s one example: in late May, we were preparing a bid for a sizable project. In setting up the tender bid, we did what we always do—we consulted current pricing.

Then the bidding deadline got extended.
A week later, while doing our final bid audit, our local supplier provided us with updated numbers: a 17.7% increase in lumber prices, in only two weeks!

This project wasn’t scheduled to begin framing for six months. The contract still had to be awarded, the permit attained, and the foundation completed. If prices could rise almost 18% in only two weeks, what would they be in six months? Would the market continue to go up? Surely, it couldn’t go much higher. But, then again, we had been saying that for the previous four months! With the tender deadline imminent, we faced a haunting question: Do we bid or not?

Suddenly our whole approach to bidding was flipped upside down. Instead of being able to focus primarily on providing value for our clients through efficient bidding, we had to focus on avoiding "the winning bidder's curse."

I know: How could winning a major construction project be a curse for a builder? By submitting a bid too low to account for the rising costs of building materials. In that scenario, a construction firm could lose money on a project before the project even began. In such an uncertain business climate, it’s hard to know what to do after winning a bid. Do you celebrate, or assume the crash position?

Flexibility in the client / builder relationship

This year has demonstrated to us the importance of business relationships rooted in trust and good faith. Clients have had to wrestle with the question, “Do I sign a construction contract that contains a variable clause?” For years, we urged, “No! Don’t ever do that!” That’s because we’ve heard of too many instances in which farmers received final invoices loaded with price overruns to the budget presented earlier. And we have always prided ourselves in staying on-budget, avoiding project overruns and not sending out invoices filled with unpleasant surprises.

At the same time, what builder can afford to ink a contract with a client who is unaware of, or indifferent to the reality of surging prices? When a customer insists that a builder honour an outdated quote—despite obvious volatility in the market—it doesn’t exactly make for a great client / builder partnership. I can assure you that most builders aren’t looking to get rich on one job. But neither are we looking to go broke on one project!

So the question becomes: How can clients and builders structure fair contracts that allow for flexibility during a period of wild market fluctuations?

This is why good faith collaboration between farmers and builders is so necessary. So far in 2021, we’ve found that constant reviews are necessary throughout the bidding, contract, and building process. We’ve had to ask ourselves, “Are the prices we used in the original bid still current, as the client is set to ink the contract?” And we’ve had to quote some projects a second time. Months later, when a building permit was finally issued, we’ve had to hold our breath. Have there been price increases in these intervening months? If so, another adjustment was made.

It’s easy to see why the question “To build or not to build?” can be so perplexing. How is a client supposed to budget when prices are subject to such wild swings? How can they avoid surprises when the invoices start arriving?  And how can builders make plans, deliver great value, take care of clients and still earn enough to keep their companies afloat?

All in all, it’s been an interesting and exciting year. We’ve had to adapt and alter our contracts. We had to return some project deposits. We even learned to rejoice over lost projects! While it’s true that some of our early contracts sustained additional charges, other more recent contracts—when material prices started falling—reaped applied credits.

Through it all, we’ve learned to appreciate clients who share our values. It’s been a joy to serve fair-minded clients, anchored in relationships of trust.

When there’s trust—when it’s obvious that a client and builder are allies, not adversaries—market fluctuations can be taken in stride. Contract amendments that allow for fairer pricing are allowed. In these kinds of collaborative partnerships, builders aren’t given a blank cheque. But they also aren’t expected to fully absorb the “curse” of surging prices. Written contracts allow enough flexibility to make sure the final build price is fair for all parties, and that the final invoice doesn’t contain an unwelcome surprise.

Finally, an update on material costs in July, we began to see a reduction in lumber prices. Then August brought a new round of metal cladding price increases. Through it all, farm construction continues at a phenomenal pace. Maybe things will stabilize this fall, maybe not.

The bottomline? The question, "to build or not to build" is really a question of "to trust or not to trust?" Work with a reputable, dependable builder with a goal of mutual success and your experience is likely to be positive no matter how volatile the market is.