What Fluctuating Lumber Costs Mean for Contractors

When it comes to lumber, money really does grow on trees.

Just a few months into the pandemic, lumber prices started rising sharply. In May 2021, prices hit an all-time high of almost $1,700 per thousand board feet. Since July 2020, lumber costs have been erratic, with sudden spikes and dips only days apart.

The good news is that lumber prices have been dropping steadily since late May.

As June comes to a close, lumber cost is now down more than 45% from the peak in mid-May. Prices are now just below the $1,000 mark. But this is still a far cry from the previous average of $400 per thousand board feet.

Analysts predict lumber prices will normalize toward the end of 2022 and return to the pre-pandemic average in 2023.

Lumber Costs & Home Services Providers

Lumber costs are often more volatile than the prices of other building materials. Most of the wood produced in North America ends up in the construction industry, which also fluctuates erratically.

Building and construction demands sometimes shift so quickly that sawmills simply can’t keep up. This leads to mismatched supply and demand. And that’s exactly what’s causing the current lumber price roller coaster.

Affects of the Pandemic

Many homeowners were stuck at home for months on end due to the pandemic. To kill time, break boredom and spend idle cash, many of them turned their attention to improving their homes.

Also, extremely low mortgage rates encouraged prospective buyers to finally become homeowners. In the fourth quarter of 2020, homebuilders had their busiest season of the year. By December, single-family housing starts hit their highest numbers since 2006.

On top of that, the pandemic had already disrupted the lumber supply chains as sawmills shut down. Those that remained operational simply couldn’t scale up to meet the surging demand for wood. And even in the right conditions, it takes about two years to open a new sawmill.

As a result, the high lumber cost increased the average price of a single-family home by nearly $36,000. It also led to delayed renovation and construction projects.

Homebuilders have had to find new ways of coping with this harsh and unpredictable business environment.

Quick Tips for Dealing with Fluctuating Lumber Costs

The pandemic negatively impacted nearly all businesses in one way or another. If there is one thing entrepreneurs can learn from 2020, it’s the importance of business agility.

Most of the enterprises that survived the worst of the pandemic did so by adjusting their business models to take on new challenges.

As a contractor, these recent fluctuations prove you should take a similar business approach. Here are a few ways you can do just that.

Flexible Pricing Models

One of the easiest changes to make is a simple one. Adopt a flexible service pricing model independent of the cost of goods. For example, consider a cost-plus pricing model.

The fixed portion of your price would include labor costs, for example, but the cost of materials, like lumber, would be passed on to your customers.

Protection Clauses

You might also consider including price escalation clauses in your project contracts. This would protect your business from unforeseen expenses.

If you choose either of the first two options, be aware that you’ll need to be able to talk customers through the need for these strategies. You’ll also need to provide specifics around when such a clause would kick in.

Flexible Scheduling

Another option is to allow some degree of flexibility in project scheduling to wait out unfavorable building conditions.

If lumber costs go up for a week or two, simply waiting out the temporary increase is an effective way to keep your costs down. But your customers will need to understand the nature of the delay so they don’t blame you.

Partner With Suppliers

Foster strong relationships with suppliers to understand critical supply chains.

You might also be able to work out some degree of price certainty with some suppliers. Your mileage here will vary, but it’s a question worth asking.

Diversify

Diversify the types of projects you take on so if one aspect of your business starts to struggle, the others can pick up the slack.

For example, what kinds of jobs can you do that don’t require a lot of lumber? It might be wise to focus on these when the lumber market spikes.

The Last Word

Lumber prices will most likely drop to the normal range over time. Maybe in just a matter of months.

But that won’t guarantee stable and predictable business operations for contractors.

While you can’t prepare for every possibility, you can take steps to minimize the impact on your business. Put these tips to use today to protect yourself against future market volatility.