The Perfect Storm - Conclusion
This will be the final installment of our web series, The Perfect Storm. When developing the story line for this series I envisioned a finite number of installments whose topics followed a natural progression from the forest to the construction jobsite. I hoped to impart a level of consciousness each step of the way that was engaging, informative, and comprehensive, at least to the extent ten-to-twelve paragraphs allows. Mostly, my objective was to challenge readers to reflect on the bigger picture. To better comprehend the complexity of all the forces at work behind the numbers. I realize it’s hard not to dwell on the numbers because, generally, that is what our industry does...focus on the numbers. It is both the beauty and the bane of construction. Reducing decisions (and understanding) to the black and white of a number promotes simplicity and supports decisiveness. The dilemma with concentrating solely on those colorless digits is that it can squelch perspective. I contend that life in the construction industry is not black and white, but mostly gray. In fact, innumerable shades of gray. Hopefully, The Perfect Storm has provided greater insight and acuity about the critical factors that are impacting your rough carpentry scope. I believe dealing from a position of knowledge and understanding always improves one’s decision making strategy and can provide you with a competitive advantage.
While our web series The Perfect Storm is winding down, storm conditions that have brought about the current circumstances in the framing world have not subsided. The lumber market continued its assent to near record levels. Our framing index hit $464 mbf on March 29th. It has only eclipsed that mark once since we introduced our commodity lumber index back in 2003 and then, only for a three week period in early May 2004 when the index topped $473. If you recall from earlier articles, the market started its run on 11/11/11 at $228. To its zenith, that is an increase of over 100%. Since that pinnacle in late March the lumber market has receded 13% in the last few weeks, down to $403. Most feel that this is only a temporary pull back since the two biggest consumption months (May & June) are now upon us and many dealers still have not yet covered needs for upcoming projects. Purchasers of commodity lumber products will have a difficult time creating sustained downward pressure on the market in the short term with inventory levels remaining low at the wholesale and dealer levels and construction activity robust. It will be hard for buyers to remain on the sidelines for very long under those conditions. Analysts feel that any major correction in the market is still, most likely, several months away.
Housing starts have continued to surge to the highest level since before the financial crisis. Overall housing starts rose 7% in March to a seasonally adjusted annual rate of 1.04 million. That is the first time since June 2008 that US homebuilders have managed to eclipse the 1 million mark. The figures were driven by multifamily starts which rose approximately 27%. It wasn’t all good news though, as single-family building, which makes up two-thirds of the market, fell 4.8% and the annual rate of building permits, an indicator of future construction, was down 3.9% from February, although still 17.3% above March 2012. Economist are still bullish on the housing market’s ability to contribute significantly to the overall US economic recovery this year.
The ebb-and-flow of the lumber market has certainly been concerning and challenging, to say the least, but I would suggest that the bigger issue at hand is the lack of qualified framing labor. The housing market has always been able to eventually adjust to material price swings but a framing labor shortage is a much different beast. Builders and general contractors have become accustomed to shortening their build-day schedules in order to maximize profits and meet owner and investor expectations. Penalties for exceeding schedules became incentive enough to push the process. This has been accomplished primarily by throwing people at the issue. Framing crew sizes grew exponentially to meet the demands of reduced framing build days on a project. Multi-residential projects expected 50-60-70 framers on site and residential crews were expected to “man-up” as well. In today’s labor climate, it has become somewhere between difficult to impossible to find crews with adequate carpentry manpower capabilities and/or the cash flow to keep them on the site. Framing numbers are certainly moving up, by all accounts from my interviews with framers and GC’s, by anywhere from 20-35 percent. But, raising framing labor prices is a slow process. The willingness of the marketplace to absorb higher framing costs (along with higher lumber costs) is meeting with resistance as buyers explore every alternative, even potentially risky alternates. At the least, builders and general contractors and labor providers need to be careful of signing a contract that ties them to an accelerated build schedule, especially one that has aggressive performance consequences. The outcome may be devastating.
Writing The Perfect Storm has been very enlightening. The result of all the research and the interviews conducted with general contractors, framers, and lumbermen has led to some great discovery. There are a few items that stand out as key critical factors above all others. Number one: workforce development will be a critical component moving forward and we must all take some measure of responsibility to create a working environment that attracts candidates into our industry. This is a very complex challenge that will take time, energy and creativity. Financial earning power must be restored so that entrants recognize the long-term viability to make a stable and profitable living within the construction industry. Secondly, and maybe even more difficult, is to re-establish the allure of working in construction. I question whether a career in construction has the same level of satisfaction, honorability, and gratification that it once held. It is my hope that the entire construction community can once again dedicate ourselves to meet the challenges of restoring the pride, admiration and esteem that was once bestowed upon an industry responsible for the building of America.
Secondly, almost everyone I talked with mentioned that communication is crucial to navigate through the erratic nature of commodity lumber buying. Being able to keep everyone informed about the lumber market during volatile conditions helps smooth over the anxiety and mistrust that can occur. Keep close tabs on the market. The builders and general contractors who reported the fewest problems with market volatility had mechanisms in place to actively track lumber commodities. When they built project budgets, they relied less on past history of what they paid last time and more on current realistic market conditions for both materials and labor. They were confident that their budget number was more attainable or at least, not too far out of whack.
Finally, forging strong business alliances seems to be a common theme of most builders and general contractors that I have spoken with in the last few months. They are instituting stringent vetting processes for suppliers and subcontractors to make sure they are truly capable of performing to the expectation level that the project demands. That’s not always an easy evaluation to make concludes Rusty Porter of C.F. Evans in Orangeburg, SC. “I think in these times, in this economy, the way things have loaded up and the way manpower has been going, subcontractors feel like they can do more but find out quickly that it just isn’t possible. They just aren’t able to pull together the workforce they anticipated and are really caught off-guard.” That has left a lot of project managers scrambling to complete scopes of work as subs fail to perform to expectations or walk off projects altogether, leaving behind enormous financial burdens for GC’s to work through along with a project dangerously behind schedule.
I believe the current environment will be especially risky for buyers who focus on initial price verses the total installed cost of a scope of work. Too often, these low cost providers are quick to jump on that low bid without thoroughly scrutinizing whether it is truly capable of delivering a finished scope of work for that price. I have been through a few scope reviews that were woefully inadequate in determining if everything was covered. One in particular, we tried to point out the deficiencies of our lower-priced competitor’s inclusions but the GC just couldn’t get past the number because that’s what he built his budget on. We would not concede to lowering our price and lost out on the job, even though we really felt we had the “right” number. Months down the road it turned out that, in fact, we did, when the turnkey supplier fell behind schedule because the framing sub could not adequately staff the project for the money he was being paid. The GC was trying to supplement the framing labor force and the whole project stumbled, months behind schedule and destined for court proceedings from what we hear. If the GC would have initially focused on substantiating the total installed cost rather than dwelling on the initial low bid the project would certainly have had a better chance of a successful outcome for everyone. The situation reminds me of a passage attributed to author, John Ruskin, entitled, The Common Law of Business Balance.
Of course, it is still an ultra competitive market out there and owners and developers are desperately trying to keep their costs down as best they can. There is a tremendous amount of pre-construction oversight on most every project these days so budgets constantly get squeezed. The result is that a significant amount of exposure exists in the process for what seems to be shrinking profitability. An attitude that the other guy is getting rich permeates the process. For instance, I am certain that builders are thinking building material concerns currently have it made with the run-up in lumber prices. But ironically, a run like we have had creates more pressure on margins because you can’t charge enough to cover replacement costs. It can be a vicious cycle with all sides vulnerable and on edge.
The good news is that the challenges we currently face are certainly more tolerable than the environment we had been facing the previous five years. And while they are “good problems” to have, they are problems nonetheless and we will face them together as an industry like we always have in the past. I am confident that the resiliency of the building industry and all the associated industries that rely on construction, will prevail, and in fact, flourish in the coming years. Yes, there will be a few bumps along the road to success. Noted author and custom builder, Al Trellis was spot on when he entitled his personal and career achievement book, The Road To Success Is Always Under Construction. His title certainly mirrors the current sentiment within our industry.
We hope you have enjoyed The Perfect Storm. As always, we greatly appreciate any feedback or stories you feel like sharing. Also, we would love to hear your ideas for possible topics in subsequent Contract Lumber blog posts.
About The Perfect Storm Author
Don Dyson has been associated with the construction industry for 30 years, the last 14 serving as Business Development Director for Contract Lumber. He started his career as Manager of Professional Sales for Olympic Stain Company where he was responsible, among other things, for the development of machine stain operations throughout the Midwest and great lakes region. It was during this time that Don immersed himself in the lumber industry concentrating on wood technology as it pertained to coating performance. He championed an educational effort in conjunction with the Western Red Cedar Lumber Association and the Forest Products Laboratory that was instrumental in educating thousands of industry associates about wood siding and coating performance. Following eight years with Olympic Stain he ventured into lumber wholesale distribution with North Santiam Lumber as Marketing Manager. He made the jump to lumber retail as Marketing Manager for North American Wood Products in 1997 and joined Contract Lumber in 1999. Don has always maintained a keen interest and focus on educational efforts at all of his career stops and he has become “affectionately” know as the chief “turd polisher” here at Contract Lumber.