Dispatch #73 - Wood Prices and Plastic Brains

“Plasticity” - How well does an organism adapt to changes in its environment?

For the rest of us - how well do we adapt to sudden changes in the marketplace?

For weeks now, I’ve been trying to write a Dispatch, “How to Plan for the Unplannable” but it wouldn’t gel. I kept going down the rabbit hole of scenario planning, which is tough to do well at smaller construction firms.

Then I read about the very recent drop in lumber prices: “A 40% drop [in the lumber price index] yesterday”, said Arkansas Associated Builders and Contractors President Bill Roachel, referring to last Wednesday [source].

It hit me that we can’t predict the future in this volatile post-pandemic world but we can keep our minds flexible to changing conditions―like an unexpected 40% drop in commodity prices―and respond quickly.

Some friends here in Berkeley had a section of fence replaced recently. What cost $7,000 to build a few years ago cost $20,000 to build a few months ago, the primary difference being the cost of lumber. (Luckily it was from storm damage so insurance covered it.)

Let’s say that was your customer but the replacement wasn’t covered by insurance, so the unusually high price meant they were “on the fence” about doing the work.

Why not call your lumberyard, reprice the job, send the customer a link to an article about falling lumber prices, and say you can do the job for $16,500 now?

Of course, you need your fundamentals in place to pull that off: a good relationship with your supplier, a rock-solid markup factor, line-item estimates, and some capacity in the office to quickly rebid that job and call the customer. And it assumes you’re bidding to the right customer, i.e., their only decision is to go/no go, and not whether to go with your firm or try to price shop you against a half dozen competitors.

We’ll likely be surprised again and again during the next year or two as the post-pandemic economy unfolds. Perhaps the best strategy then is to stay true to our long-term strategy, double-check our fundamentals, stay intellectually nimble (plasticity), and quickly process yesterday’s information into action today.

Need help with this or other financial matters faced by construction contractors? Let’s talk!

David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.