Materials, gas prices chip into business owners' profits
Charlie Eison, founder and president of ESN Building and Remodeling, a Gwinnett-based remodeling and construction company, watches a lot of The Weather Channel.
Like those who live in Florida and Gulf Coast states, Eison has kept a trained eye on the rash of powerful hurricanes that have blown through the South in this record-setting season. Though the effects of the storms haven't been life-threatening for Eison, they have negatively affected his business in the form of higher gas prices from construction deliveries and increases in costs for materials such as plywood. Eison says he's now paying about $15 a sheet for oriented strand board, or OSB, a type of plywood used for roofs and exteriors. The price marks a 50 percent increase from just a few months ago.
"It's hard to see foresee large jumps like those that Katrina caused," Eison says. "You can't see a hurricane coming, and the skyrocketing gas costs affect everybody across the board, including our suppliers. One of the first things we were hit with was a gas surcharge from concrete deliveries."
Eison's concerns illustrate a troubling trend that has been affecting the construction and general contractor industries over the last several years. According to a report issued by Ken Simonson, chief economist for The Associated General Contractors of America, consumer prices have remained moderate between 2001 and 2005, while construction costs have risen dramatically, compounded by effects of this year's heavy hurricane season. Concrete products, for example, rose by 10 percent over the last 12 months, a figure expected to rise at least as sharply over the next year.
Hurricanes Katrina and Rita struck especially hard at the supply of construction inputs ranging from diesel fuel to plastics to cement. As of late October, the majority of Gulf of Mexico crude oil and natural gas production was still shut in, virtually assuring that construction materials that use oil or natural gas would be carrying much higher prices, at least through the winter heating season. Katrina also interfered with imports of cement and natural rubber, and the hurricane damaged plants that produce gypsum, lumber and plywood.
Simonson's report also revealed that contractors that had not locked in materials prices were caught by surprise and had to absorb unexpected huge cost increases. This proved to be the harsh reality for another Gwinnett-based business owner, Kenny Deane, owner of Deane Contracting, after relocating his company to Duluth about a year ago.
"Before the hurricanes hit, we were pretty much booked for the rest of the year, so all my contracts and proposals were signed," Deane says. "I'm experiencing paying at least a third more for material than we originally accounted for."
For business owners like Deane, one of the most difficult aspects of running a company in an industry that's highly affected by natural disasters is striking the balance between earning profit and maintaining integrity with his customers. It's industry standard for a general contractor to honor the terms of a contract, even if it was signed before materials costs began to increase.
"I'm a good, honest general contractor, and I can't go back to the client and say, ‘You need to pay more,'" Deane says. "Unfortunately, as a general contractor, you know these hits happen sometimes, and you know you have to take them."
As tough as it is to swallow those profit-slicing hits, Eison says they also force general contractors to operate with a stricter sense of efficiency.
"We try to come in ahead of schedule and definitely reduce waste, and we try to conserve materials," Eison says. "We're real big on making sure that if we have a little bit left over, we'll save it. If there are three pieces of sheetrock left and no one is going to going to pick up, we save it to use it later. Those things add up, and they're a way to weather something like this."
Of course, there's also The Weather Channel to stay aware of potential storms and the accompanying price jumps that come with them. "We live by it," Eison says. "If you need a weather report, you can call me."
