Episode 79
Contracts 101: Mitigating Risks in a Changing Market
The current discourse centers around the critical and often contentious issue of navigating contracts amidst fluctuating tariffs and price changes, particularly as they pertain to the construction and design industries. In this enlightening dialogue, Eric G and John Dudley delve deeply into the implications of recent tariff implementations, notably the impending increase on imported wooden cabinets and softwood lumber from Canada. This discourse elucidates the necessity for contractors to adopt proactive strategies that safeguard their businesses from unforeseen financial discrepancies that could arise from material cost escalations. The speakers advocate for the incorporation of specific clauses within contracts that delineate the responsibilities and expectations regarding price adjustments, thereby ensuring that contractors are not unduly burdened by sudden market shifts.
Furthermore, the discussion emphasizes the importance of flexibility in estimates, recommending that contractors establish a 30-day validity period for their proposals. This approach not only allows for timely adjustments in light of evolving market conditions but also fosters transparent communication with clients regarding potential cost increases. Eric and John highlight the significance of maintaining meticulous records of change orders and ensuring that all involved parties are cognizant of the economic landscape, which may influence project costs. Through meticulous planning and strategic contractual agreements, contractors can better navigate the turbulent waters of pricing volatility while upholding their professional integrity and financial viability.
Takeaways:
- In order to effectively manage fluctuations in material costs, one must implement flexible contract stipulations that allow for necessary adjustments.
- Establishing a clear timeframe for estimates, such as a validity period of thirty days, is essential to safeguard against price changes in the market.
- Clients should be informed of the potential for price increases due to tariffs and other market fluctuations to ensure transparency in business transactions.
- Incorporating specific clauses in contracts regarding possible price adjustments based on unforeseen circumstances is a prudent practice for contractors.
- Utilizing change order pads in the field enables project managers to document necessary modifications promptly, thus minimizing potential disputes with clients.
- Maintaining communication with clients about tariff impacts on project costs fosters trust and reinforces the contractor's professionalism and reliability.
Companies mentioned in this episode:
- The House Pro Insider
- IKEA
- Kitchen Cabinet Manufacturers Association
- American Woodmark
- Craft Made
Transcript
Foreign.
Speaker B:The House Pro Insider.
Speaker B:This is the podcast for trades pros, carpenters, contractors, interior designers and innovators building homes, renovating spaces, or creating the next big thing.
Speaker B:Let's dive in with your host, Eric.
Speaker A:G. Welcome to the around the House Pro Insider.
Speaker A:This is for all you folks out there in the trades, all the people that we love working with, whether you're a designer, tractor inventor.
Speaker A:Don Dudley and I are here to have some fun and really answer some questions for you and give you some guidance out there.
Speaker A:Because I know when I was running my design business, there was times that I was so close to the trees I couldn't see the forest.
Speaker A:And we're here to help you out.
Speaker A:Good to see you, Dudley.
Speaker C:What's happening, brother?
Speaker C:Good to be back.
Speaker A:Yeah.
Speaker A:Today I wanted to talk about my friend.
Speaker A:I think one of the biggest challenges that I am seeing out there, especially here in the US for contractors, is how do you deal with price increases, tariffs, all that kind of stuff?
Speaker A:Because here about, about 10 days or so, depending on when you're listening to this imported, those knockdown Chinese cabinets that come in, you got to put them all together like IKEA stuff.
Speaker C:It's going to be the other day.
Speaker A:Upon those things here, quickly, we're going to see that really jump up as well as There's a new 10% softwood lumbers tariff coming in from Canada.
Speaker A:So we're going to see some of that Canadian lumber going up, which as a contractor, you go, okay, what do we do to work with that?
Speaker A:It's really creating yourself a model that's flexible enough so that when those things happen, you can go back to your client and go, hey, by the way, your cabin code just went up 50%.
Speaker A:By the way, guys, I'm not eating it.
Speaker A:Right.
Speaker A:Yeah, that's a tough one.
Speaker C:And that's just putting amendments in the contracts, Right?
Speaker C:Just stipulations that say if this were to occur or volcano caught the world on fire.
Speaker C:Yeah, I'm not eating the cost if these based on today's prices sums all that up.
Speaker C: now, if your cabinets are now: Speaker C:So you guys are going to have to find that.
Speaker C:Not me, the contractor.
Speaker A:Exactly.
Speaker A:And first off, this is where you get great legal advice, contract attorney to go through it.
Speaker A:But basically what you want to see in there is, and my thing is too is give yourself, when you write out an estimate, give yourself a 30 day on that.
Speaker A:Don't give us estimate good for six months.
Speaker A:If you want to revisit it, you Want to talk to these people again.
Speaker A:So if they go, hey, I'm not doing this for three months.
Speaker A:No problem.
Speaker A:We're just going to make sure that we update it every time.
Speaker A:Because if you come back and you know something's happened, you've at least got that out.
Speaker A:It's creating outs for yourself to protect you.
Speaker C:And that's been standard practice for years.
Speaker C:That's at the bottom of almost any contract that's well written, valid for 30 days.
Speaker A:This absolutely estimate this proposal, and that's important.
Speaker A:That's one of those things that you look at and go, okay, I need to do that.
Speaker A:And second of all, have those outs like we were talking about.
Speaker A:Have it.
Speaker A:This is based on the prices of today.
Speaker A:My labor prices may not move.
Speaker A:Material prices are based on today.
Speaker A:If we have anything that raises that material price by over 5 or 7% or whatever it is from here, or if there's any tariffs, natural disasters, that kind of stuff, then we might have to adjust this quote based on this.
Speaker A:But this is based on the information I have today.
Speaker C:Yeah.
Speaker C:And I would say two things.
Speaker C:I would say any client, that box at that you probably don't want to work with anyway.
Speaker C:And secondly, that's just prudence.
Speaker C:In an environment that we've got going on right now, we don't win.
Speaker C:We don't know when the next tariff is coming.
Speaker C:We don't know if it's going to be on copper.
Speaker C:We don't know if it's going to be on doorknobs from Pennsylvania.
Speaker C:We did, like, it could be anything at this point.
Speaker C:So, yeah, cover your ass.
Speaker A:Absolutely.
Speaker A:It used to be when I was doing projects and stuff that you'd see guys, electricians going into Home Depot and Lowe's buying wire off the shelf in there because they could get it cheaper there than anywhere.
Speaker A:That was their loss leader.
Speaker A:Now I can jump on Amazon and buy it cheaper.
Speaker C:Yeah.
Speaker A:So you start to look at.
Speaker A:And again, like you said, metals, that's huge.
Speaker A:You know, as far as.
Speaker A:And when wire goes up, man, that electrical price goes up quick.
Speaker A:Because when you're wiring a house or rewiring a house, there's thousands of feet in that house.
Speaker C:Yep.
Speaker A:And that adds up super quick.
Speaker A:And so really, I think what we're gonna have to pay attention to.
Speaker A:And the kitchen cabinet one is interesting too, because not only is it on imported cabinets from China, but here's the little thing that people are missing that they're not talking about out there.
Speaker A:It says end related components.
Speaker A:Now, this is where the related Components part comes in and I think this was put in by the Kitchen Cabinet Manufacturers Association.
Speaker A:Why?
Speaker A:Because they were fighting against these Chinese terrorists.
Speaker A:We had them on the around the house show probably 18 months ago on the regular show.
Speaker A:The Kitchen Cabinet Manufacturer association, all those brands and the home centers, American Woodmark, Craft Made, all those guys back then were sending a ship full of containers all the way over to China with plywoods and particle boards in it.
Speaker A:They were having them cut edge, banded and shipped back because it was cheaper than running saws in their business.
Speaker A:So they were doing that.
Speaker A:Well now with components, all of these companies that have been ordering parts from overseas and having them machined over in China or wherever in Southeast Asia and coming back now they're going to pay a full on tariff.
Speaker A:They'll be end up paying 50% on that.
Speaker A:So all of a sudden maybe it's not cheaper to send that over there anymore.
Speaker C:Yeah, they're getting dinged as well, so.
Speaker C:Yeah, yeah.
Speaker C:And that's the idea of these things, right, Is to change that format, to change the run of the mill, shipping, labor out.
Speaker C:Right?
Speaker A:Yeah.
Speaker C:I mean not political sides here, but I get the idea, I get the concept.
Speaker C:It's definitely not making anything easier on anybody, but it is furthering an agenda of one party or another.
Speaker A: which they added to US in the: Speaker A:Think about that.
Speaker A:Yeah, would I rather pay a little bit more days tax go down?
Speaker A:Yeah, let's talk about that.
Speaker A:I wouldn't mind seeing that a little bit.
Speaker A:I wouldn't mind putting a little more money back in my pocket.
Speaker A:That's me.
Speaker A:But will that bring jobs back to Craft Made, American Woodmark and those guys?
Speaker A:You darn.
Speaker A:Because they don't want to come back and say, oh, they've been really quiet about that too.
Speaker A:It's.
Speaker A:They still have their made in America stamp.
Speaker A:Yeah, there's a majority of the parts are, but there's a lot of pieces they're shipping overseas.
Speaker C:And I can imagine, I'd imagine they're doing a lot of math in a lot of different departments over there from accounting department, Marketing, Marketing and PR on down.
Speaker C:All right fellas, what does it cost?
Speaker C:Fire up that saw.
Speaker C:And how are we going to handle this story on the platform publicly?
Speaker A:Yeah, you know it, brother.
Speaker A:And here's the thing, these CNC machines these days, they really don't cost that much to Operate?
Speaker A:Yeah, you have to buy the saw and these guys had the saws anyway.
Speaker A:But really you can stick those over in the corner and you can load in full on unit of plywood grade material and it'll grab it out the sheet off of it, load into the saw and kick it out with parts.
Speaker A:And there's stickers already on the sides and tell you what part it is.
Speaker A:This isn't a ton, but I tell you what, it does add up as far as the dollars coming and out, which will be interesting as well because that means there's less transportation, less ships.
Speaker A:You could almost make an argument that's a lot greener than putting it on a fuel oil powered ship to go across the seas and back.
Speaker C:Absolutely.
Speaker C:Again, how much could they be?
Speaker C:That's a hard one for me to fathom.
Speaker C:Like if you've got the equipment, you've got the manpower.
Speaker C:Obviously the manpower is kind of the bigger expense.
Speaker C:So is shipping an entire container ship full of goods over there.
Speaker C:Who knows what percentage is damaged and flipped.
Speaker C:There's so many factors to consider.
Speaker C:I myself would rather keep it in my shop for no other reason than I know it'll get done and it'll get done right.
Speaker C:And even if it cost me a few extra bucks, I put that on my price tag.
Speaker C:And people know they're buying a quality product.
Speaker A:See, I look at it and go, okay, wait a minute.
Speaker A:So I don't see where the savings really is because you still have to unload something and put it on the shelf either way because you're stocking parts.
Speaker A:So you still have to load that up.
Speaker A:You've got to.
Speaker A:You're still handling almost all of it except going into the saw and coming out of the saw.
Speaker A:That's the part that I just go.
Speaker A:I don't see where the savings is on that, but obviously get the craft.
Speaker C:Made on here and talk to him about it.
Speaker A:Yeah, I got a feeling they don't want to talk about that.
Speaker C:But I'm curious.
Speaker A:But I'm curious guys.
Speaker A:No, but we could have the riddle me this.
Speaker A:We could get the Kitchen Cabinet Manufacturers association on a talk about it.
Speaker A:I'd like to see their take on it.
Speaker C:I would love to hear.
Speaker C:That would be super interesting.
Speaker A:And then on the show, Johnny, you and I were.
Speaker A:You and I were sitting here talking on.
Speaker A:On this weekend show, on the around the house show.
Speaker A:We were talking about the cost versus value report.
Speaker A:I'm gonna bring on here.
Speaker A:I'm working out a deal.
Speaker A:Here's a little inside for you guys out There that are around the house listeners.
Speaker A:And Johnny, I haven't even told you this because you and I have been passing like ships in the night, but I have John, my buddy John, who runs the massive Facebook group called Ask the Appraiser, and he was looking at the cost versus value report going, wait a minute, these values don't seem right.
Speaker C:Huh?
Speaker A:Okay, I'm like, let's hear this.
Speaker A:I want to debate this out.
Speaker C:Yeah, I like that.
Speaker A:I'm like, all right.
Speaker A:And so him and I were chatting yesterday about, hey, let's come on the show and the three of us could sit down and have a chat with the expert appraiser.
Speaker C:Yeah.
Speaker A:To see what his take is.
Speaker A:And I'm like, all right, that's interesting.
Speaker A:I want to see this.
Speaker C:Yeah, so do I as a guy that's bought tens of properties.
Speaker C:Look, you know me, man, I love it when it gets gritty and I love it when there's a good debate and I love it when we can get down to the truth.
Speaker C:Right.
Speaker C:With just a good conversation.
Speaker C:No bicker back or diada.
Speaker C:But yeah, brass tax what's real and what's not and how does that make sense or not make sense?
Speaker C:And yeah, why does it continue that way or what do we do to change it?
Speaker C:Solutions, man.
Speaker C:I love getting to the solutions with a good gritty conversation.
Speaker C:I'm so down for that.
Speaker A:Yeah, absolutely.
Speaker A:And brother, one other thing I wanted to talk about in the show too is just change orders.
Speaker A:That's one of the things, especially with prices and things going around right here.
Speaker A:Make sure your guys in the field understand what's going on because sometimes you'll have project managers that aren't watching the news that have no idea that a tariff's coming up around the corner and they're writing change order in the field.
Speaker A:And what I used to like doing is I had change order pads in everybody's vehicles.
Speaker A:Pre written contracts, tear off single page.
Speaker A:Hey, we're doing this.
Speaker A:Here's the cost.
Speaker C:If you don't, they never get done.
Speaker C:And then at the end of the job you've got 13 that you know they were there, but you don't know exactly what they were.
Speaker C:And, and yeah, you lose money.
Speaker C:Been there.
Speaker A:And your client, Mrs. Smith doesn't remember either.
Speaker A:She's.
Speaker A:Yeah, you worst part, now you're, are you eating a change order or did the change order happen and then she changed her mind again and then wants to debate that out.
Speaker A:Why did I pay for that?
Speaker A:We don't pay you to put it.
Speaker C:Back that always gets sticky.
Speaker C:And yeah, there's a tablet in the car.
Speaker C:Do it right then.
Speaker C:Oh, you want that to be green.
Speaker C:Okay.
Speaker C:That is because in the contract here it says blue.
Speaker C:So let's just sign this quick.
Speaker C:It's going to be an extra charge change order.
Speaker A:It's paperwork.
Speaker A:And then what I always tell people to do when you do it, especially with that these days, take a picture of your phone after you got it signed.
Speaker C:Yep.
Speaker A:Phone saves to the cloud.
Speaker A:You've got it good to go.
Speaker C:Yep.
Speaker A:It's an easy way to do it.
Speaker A:And just tear off change orders.
Speaker A:Smartest thing.
Speaker A:And again, this is where you spend a few hundred bucks, maybe a thousand, depending on how big your business or if you're in a trade organization where you can use their contracts.
Speaker A:The problem though is you want it state by state.
Speaker A:Because what I have for a contract in Oregon might be completely different than somebody in Washington or New York has.
Speaker A:So you need to make sure that it's for your area that you work in.
Speaker A:Because when it comes to you contractors out there, and I love you guys, the stuff you guys have to navigate like here in Oregon, it's really easy.
Speaker A:You have a contractor's license that covers the state of Oregon, period.
Speaker A:Washington, the same thing.
Speaker A:But when you get into many states around, especially get in the Midwest, even up east, there's no state contractor's license.
Speaker A:It's for the city of Philadelphia.
Speaker A:But if you walk across the street into the township, county or whatever else that's there, it doesn't work for that.
Speaker A:Then you have to go over and get another one for over here.
Speaker A:And so it's a citywide or county wide or township wide versus.
Speaker A:Versus a statewide.
Speaker A:And I think it's so much easier to navigate when it's a statewide because you don't have to say not only do you have a contractor's license, but where are you working?
Speaker C:The east coast has always been better at getting their hands in the coffers.
Speaker C:So hats off to them, huh?
Speaker A:They make you pay 10 slot, 10 licenses.
Speaker A:That's the deal.
Speaker A:It's almost like the mafia in a way.
Speaker A:Oh, yeah, you want.
Speaker C:I was.
Speaker C:I didn't want to say it, but yeah.
Speaker C:Let's just say they're older and more experienced than we are out in the West Coast.
Speaker A:Yeah, yeah.
Speaker A:They've got the shakedown rocking and rolling.
Speaker A:They got it rocking and rolling, brother.
Speaker A:Thanks for coming on today.
Speaker A:I wanted to keep this short, as we always do, trying to keep these things under 15, 20 minutes.
Speaker A:And that way you guys can just get a big nugget listen during your break and make sure you share these to your friends, too.
Speaker A:You guys tuning in out there, Share it up.
Speaker A:We'd appreciate it.
Speaker A:We're trying to grow this back out and we're going to be bringing in some experts, too.
Speaker A:It's not just always going to be Dudley and I sitting here bantering on this.
Speaker A:We're going to bring in some great experts to help you with that and something I'm currently working on right now so you can get a lot going on and that way you got something new and a new nugget to learn from for next week.
Speaker A:Anything else you want to add, Johnny?
Speaker C:No, I think we're good.
Speaker C:I think we touched on a lot of things.
Speaker C:I want to continue on and bringing on some experts with relation to topics like this or.
Speaker C:There's so much.
Speaker C:But yeah, man, I love the grit.
Speaker C:I say, yeah, let's bring some folks in and get it exciting.
Speaker C:Yeah, yeah, yeah.
Speaker A:Rule it out.
Speaker A:Do it out.
Speaker A:All righty.
Speaker C:I'm Eric G. And I'm Johnny D.
Speaker A:And you've been listening to the around the House Pro Insider.
Speaker B:Thanks for tuning in to the around the House Pro Insider.
Speaker B:We are happy to be back.
Speaker B:Make sure you subscribe so you know to catch the next episode.
Speaker B:We will see you next time.
Speaker C:Man, I need to focus now.
Speaker C:What is that.
