Material suppliers are the last in line to get paid on any construction project, even behind subcontractors. Anything that you, as a subcontractor, can do to reduce their risk will help you build better relationships with your suppliers and ultimately, get better deals on your materials.
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What Subcontractors Should Know About the Material Supply Industry
One of the biggest issues facing contractors is the volatility of construction material pricing. So what are the forces creating such a big impact on the price of lumber, steel, and other materials? We hear time and time again that global economic factors, material shortages, and supply chain issues are causing inflated material prices, but what does that actually mean for subcontractors?
Well, the fact of the matter is that as a subcontractor you probably don’t have the resources to accurately predict future material prices – not even data analysts can predict future material prices with certainty, but you don’t necessarily need to. The material supply industry in the United States is very competitive because of the way that it is structured and that is to the benefit of subcontractors.
Ex: Sika, Quickrete, Etc.
Ex: HD Supply, Home Depot, Etc.
Distributors are the ones who sell to contractors. Yes, material pricing will be influenced by global economic factors, material shortages, and supply chain issues on raw materials, but the person you are negotiating with on material pricing is not the one setting pricing.
You may be able to get a few bucks knocked off your pricing from one distributor to another, but manufacturers are the ones setting pricing. Distributors are buying at rates set by manufacturers so when a manufacturer tells them that the price of something is doubling on their next order they don’t have options other than raising the price and every other distributor is in the same boat.
So while material pricing will fluctuate greatly based on the time of purchase material pricing, you should expect to see very little fluctuation between distributor’s pricing.
How to Get Better Pricing on Construction Materials
Due to how volatile material pricing is some of the options that were once available to subcontractors to reduce pricing when buying construction materials are no longer available. We spoke with Tony Gonzales, Vice President of ASR Materials, who said that discounts on materials largely come down to distributors being able to “use a discount as leverage to mitigate financial risk to their organization”. In summary- the less risk you, as a subcontractor, present to pay a distributor for goods that you order the more willing they are to discount material prices.
A lot of distributors used to lock in pricing for customers if they were able to pay for materials in advance, but the industry is changing. In the last few years, manufacturers and raw material suppliers started sending “open purchase orders” to distributors. An open purchase order means that the pricing isn’t set and is dependent on shipping dates meaning that when a distributor purchases materials they don’t even know how much it will cost until closer to the shipping date. Since distributors still need to limit their risk when selling materials they can’t give contractors accurate pricing information either.
The following advice is based on things you, as a subcontractor, can control. We focused on actions that you can take tomorrow to get better pricing on materials from your material suppliers.
1. You are more likely to get a discount from distributors if your company’s order volume is high.
If you are always shopping around for the best bid you may be hurting yourself more than helping. As you build relationships with suppliers and you have higher-order volumes, they are much more likely to extend more favorable payment terms, give discounts when you need them, and help you source materials faster than your competitors. Sometimes working with 1-2 distributors more regularly is the best option than working with the lowest bidder, but having to use 6-10 different distributors.
2. Limit your financial risk to distributors by paying within 30 days or less
*Unless your distributor extends longer terms
We can’t emphasize this enough– the less financial risk you, as a subcontractor, present to a distributor the more likely you are to:
- Have your terms extended
- Have discounts applied to your materials
- Have increased material allocations from suppliers
- Create better relationships with your suppliers
That means that you should be paying your distributors on time every time. If you can pay them upfront that can give you even more favorable terms, but it also hurts your business cash flow which is why options like Material Financing exist.
Every aspect of getting better deals on construction materials revolves around limiting your perceived risk to a material supplier. If you want better deals on materials, build a good relationship with your suppliers by paying them within 30 days or less and use the same suppliers as much as possible.