How to Manage Materials & Supplies Risks and Protect Your Profit

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ℹ ABOUT THIS EPISODE

Protect your construction business from materials and supply chain disasters that can tank profitable jobs. Wade and Stephen share proven strategies to manage vendor relationships, negotiate stronger contracts, handle overseas orders, and avoid costly delays. 

Learn when to require supply bonds, how to document everything properly, and what to do when suppliers threaten bond claims. Essential tactics every contractor needs to safeguard cash flow and maintain project schedules.

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⌚️ Key mistakes we cover in this episode:

• 00:19 The Challenges of Sourcing Materials
• 01:47 Impact of Market Changes on Construction
• 03:00 Vendor Relationships and Risk Management
• 05:18 Best Practices for Managing Supply Risks
• 06:31 Handling Supply Chain Issues and Legalities
• 10:17 Proactive Measures and Documentation
• 17:09 Dealing with Payment Bond Claims

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] What do you get when you order a one of a kind unicorn widget from overseas? If you guessed a magical box full of Profit, you're clearly in the wrong business. Welcome to the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, what are we talking about today?

Stephen Brown: Well, we're talking about materials and supplies and managing the risk of that. Oh my goodness. That's a hot topic right now, isn't it? With tariffs and everything. But also I think you hit the nail on the head in your introduction. As construction gets more technical and more difficult, the market is so much smaller now. There's people around the world with tremendous products. Architects and engineers want those products. They wanna see them, they're excited about them, and it's sexy. It's fun to study that product and include that in it, and then say, wow, look what so and so did on that project.

That's all fine and dandy, but you as a contractor have to deal with that. You deal [00:01:00] with it by either not doing the job or bidding the job, trying to work it all out later.

Wade Carpenter: A mutual client had a situation that recently happened where, something was ordered from a third world country basically. 

Stephen Brown: No. It wasn't. It was Luxembourg. It seemed like it does, because doing business in Luxembourg seems foreign into us. 

Wade Carpenter: But it was some kind of really specific thing that they really couldn't get anywhere else. When there's trouble getting stuff here and like you said, not just tariffs, things happen, things get broken. 

Stephen Brown: In shipping. Yeah, things get broken on the way. 

Wade Carpenter: And so if your job is depending on that, and it takes several weeks or months to get that materials and you can't replace that really quickly.

Stephen Brown: That's right. And let's talk a little bit about materials and supplies. Okay. So we know tariffs, prices may change. Here's a little bit of facts. And this is the Liberty Mutual Perspectives newsletter that they sent out to surety agents.

Federal Reserve's gonna keep interest [00:02:00] rates at 4.33%. Gross Domestic Product is up 1.8%. Of all the construction input prices, steel milled products year on average, 8.8%. Concrete project products up 2.5% and then lumber and wood up 1.8%. Interestingly enough, asphalt fuel related products and diesel fuel are all considerably down. Diesel fuel's down 8.8%, so there's some interesting information. Also, non-residential construction worker right now, 7%. And they're anticipated 3% of next year.

So these interest rates have a whole lot to do about your business. We've talked before about the public work that's out there to be done. And so anyway, whatever project you're looking at doing, you're reading a set of specs and maybe we could just walk through that a little bit. What are some tactics you can do when you're buying supplies or materials [00:03:00] for a job?

One thing is if you are a smaller contractor, you gotta depend a lot on your vendors and that vendor relationship. That's huge. If you're a bigger Contractor, you might be trying to hoard product and control the prices so you can make more Profit on your work. But anyway, those vendor relationships are everything. As a trade contractor, we see more and more payment bond claims come in. First of all, every vendor is gonna want a copy of your bond. If you don't pay them on time, they're gonna threaten to file a claim on your bond.

Also that's the magical way now of pressuring people on bonded projects. I'm gonna file a claim on your bond, but that doesn't mean they can do it. What are the terms and conditions you agreed to, and if you defaulted on that. So that's one thing.

Also we talked about certain products that are specked out and vital to you finishing the job. So remember how many things can happen where the job's on schedule that can just [00:04:00] absolutely throw the brakes on it. All of a sudden it stopped. Everything stopped. Your ability to project your cash flow and everything just stops because of this certain situation. Materials and supplies are one of those things.

What I was hoping we could talk about, as we talk through the process of ordering things, what tactics can you do, what can you do to help minimize the risk of those materials and supplies? And we talk one about vendor relationships, that's vital.

Wade Carpenter: I think we're also talking about a lot more just the vendor relationships and especially if we got something that's sort of outside the box. We don't order every day or if something is late, if you don't get it on time. It's not just the price of that, but you're talking about lost time. You're talking about, your reputation. You're talking about possibly an angry client. Things get pushed back and sometimes it can have this cascading effect. So a lot of times these kind of things can really tank an otherwise profitable job. And I think [00:05:00] part of what your message today is, should you actually be taking this on if it is something that's really risky, or can you mitigate the risk with some of the things you're talking about?

Stephen Brown: That's right. Can you mitigate the risk? Can you make that risk palatable and still make enough profit on it? That's the key to this whole podcast topic. What can you do to mitigate the risk?

Number one, make sure that if there's a specific item in there that's gonna affect your ability to finish that job on time, that you tie things down. You tie them down in the contract with the supplier. Now remember when fear exists and a salesperson is telling you, oh, I can't get that. I'd love to for you, man, but I can't get that. We can't do that. No, we don't sign that. We don't do that. Just think again. Okay. There's other options.

There's always other options. First of all, what about the agreement you signed for those materials or supplies? So many of them, especially from the supplier and material supplier standpoint, have the most vague language in it. Like [00:06:00] we will endeavor to do it during this time period. We will do our best to do this. That's too vague. When you have a project that depends on this, you have to tie down exactly in what timeframe it'll be delivered and they have to agree to it. Furthermore, I preached this before, require them to provide you a supply bond. It costs maybe two tenths of a percent of whatever that cost material purchase price is. But it helps you put pressure on them without an attorney if they're not coming through.

So what do you do when a job specked out to one particular supplier with one particular pump, for example, and that's what the architect engineer wants? What do you do? You gotta have a contingency and you've gotta communicate. We will do this, but we will not sign a contract with you if they default on providing this because you're the one that worked this out with this material supplier. Does that make sense?

Wade Carpenter: Absolutely. And I guess I'm going back to how can we put these in a bucket? Some of the I [00:07:00] would say common supply material risks falls into one of these five categories. Is it available? Is it gonna come in and the quality is bad? Is it actually gonna show up on time? Are we gonna have cost escalations? Are we gonna have confusion about who's responsible? There's a lot of different factors that can go wrong here. And what we end up with is, sometimes it turns into this blame game. What do you do when it gets into the point where people are starting pointing fingers?

Stephen Brown: First of all, you try to minimize that from happening by overly communicating. And you do that in the contract you sign, the agreements you make and the discussions you have. And also what leverage are you using to accomplish your goal? You might say what do you mean by that?

It's how you go about procuring those materials and supplies you need, and what methodology you use. You may have used a simple method. I've got five people in town I can order from. I'm just gonna call around and go with the best price, [00:08:00] or whoever can get it to me the fastest. I put in enough in my bid to cover some extra contingencies. It's what you didn't put in your bid that you think I've got enough profit to cover.

We had situations during COVID where project managers just weren't ordering stuff fast enough. And then the shipping got delayed and the project cost them a fortune. You think the owners, the architects, engineers gave them a break on that? No, absolutely not. That's your problem. It's not our problem. All we know is you signed this contract with us and you said you were gonna have it on X date and it's not done. So we're gonna hold you to this contract you need get it fixed. We're gonna hold you to this contract. Okay, what about you having other people that you can hold to your contract? Is that possible?

I mean, no, no, no, no. My [00:09:00] vendor tells me that they don't do it this way and that I know your attorney's telling you that, we don't do it that way.

Now, look, Joe Blow down the street. He's going to take all the steel I can give him at X price. And he isn't signing on all this crap. So look, either you want it and you sign now on my iPad right here in the signature thing, or you don't.

Wade Carpenter: Absolutely.

Stephen Brown: Seriously. You gonna take that crap? Sometimes you might have to. But at least you know if you're taking that crap, you're gonna know what it is before you bid the job.

Wade Carpenter: You hope you do.

Stephen Brown: We see claims all the time like this, Wade. In my business, we see them all the time. Please don't go there and do this. Be aware of what you're doing. You're not in business to lose money. If you think you're gonna lose money or it's too risky or people won't work with you on it, don't do it. 

Wade Carpenter: Great point. 

Stephen Brown: Or bid it with so much profit in the craziest realm of things, you can work it [00:10:00] out. How much is that? 30%, 40%, 50% profit? Remember, in construction there is a cap on how much money you can make in profit, but there's no cap on how much money you can lose. Whoa, what a horrible business plan that is.

Wade Carpenter: Absolutely. Can we talk about some best practices, how contractors might manage their risk? 

Stephen Brown: Sure.

Wade Carpenter: What comes to my mind is things like documentation. Documenting everything, whether your scope, the specs and all that stuff. The terms and conditions, having purchase orders where you lock in a price. What do you think about that?

Stephen Brown: Yeah, make sure you're communicating. Everybody knows what's going on. That's the key.

Wade Carpenter: Just a couple other ones. I know this is more your topic, I think about supplier vetting, relationship management, making sure you've got a good supplier and good terms with them, maybe having a backup supplier.

Stephen Brown: Yeah, everybody has backup suppliers. But you wanna keep your relationships with the people that help you in the hard times. Your vendors that help you, and you wanna keep those [00:11:00] relationships going if at all possible because you're helping each other, right?

Wade Carpenter: What about things like shipping procedures? It comes in and they just dump it off and they wanna be done. What if it came in damaged or something like that? I know I had a situation a few years ago where they just dumped it in my lobby and it was completely destroyed, what I had ordered. I've seen some of these procedures where basically if you sign for it, you own it. Could we do things like taking photos on delivery and stuff like that?

Stephen Brown: Great point. Photograph opening the crates with your timestamp on it. That's a great idea. Because a lot of this material is damaged and can't be used. You have things that just don't fit together because they're damaged in shipping. And then you look at the exterior of the package as it's dropped off, whether it's taking a beating or not.

You unpack this stuff all the time, hopefully. But you only have a short window of time to communicate that and to deal with that. Because if it's damaged, it's gonna slow your job down. No matter how soon you think you ordered the [00:12:00] product to store, it's gonna slow your project down.

Wade Carpenter: Just a couple of more of these. The insurance risk transfer one way or another, working it through the contract. You've already talked about that.

The other thing that I think about is the cashflow buffering. Are you gonna have to put the bill for that upfront? Are you gonna be able to collect some money to be able to do that? That's another big thing that could obviously if you got a huge out of pocket and you can't collect on that.

Stephen Brown: Yeah, talk to the owner in the pre-bed meeting, preferably, even if it's in front of other contractors, will you allow us to stockpile these materials and will you pay for them? What they'll do is they'll say, if you can show that they're insured and they're stored in a secured facility and that you've paid for them, we'll go ahead and front you the money for those materials.

They wanna be able to control those materials are going to their project though. And you have to show them how that's being done. A lot of times the material supplier vendor themselves will take that product and segregate it and store it for [00:13:00] you, or you could send it to an independent location for that particular job.

But either way, the owner's gonna manage that. It used to be they didn't like doing that at all, but, they'd rather get good bids and manage that part of it. You could say can't you just give them a copy of your performance and payment bond? The payment bond guarantees you'll pay for everything. And they just don't do that either. They don't want to get into that.

Wade Carpenter: I had some other thoughts, but what else did you want to cover on this one? 

Stephen Brown: Again, the contracts that you signed with the material labeler supplier. If it's vague, make it more specific. Just make it more specific. Get your attorney to help you make the contract specific. When you agree to buy something, you can present them with your order form. And they'll say, no, no, no, no, this is our order form. And say, okay, I'll send it to our attorney to look over. It should just take a few days. But this is all we want, we just wanna tie this down. You said you could do it. When we talked on the [00:14:00] phone, you said you could do it. Oh, this has to go through our legal department. Really? Yeah. Well, It'll go through mine too. We don't have time for this. You said, you would have this material for me easily within 60 days. All I'm asking you to do is put 140 days. That's more than twice what you said. You're tying them down to a key element of your project time-wise. Time's money, liquidated damages, certain delays in project, just go ahead and take whatever liquidated damages you agreed to, and that delay in the materials of 21 days at $5,000 a day, what does that do to your profit?

Wade Carpenter: Some of the things I was wanting to kick around, a couple of the red flags or warnings, you've already said, obviously a last minute order might be a problem. If you've got these custom orders or some kind of obscure thing, you got more risk. If you're having to get it overseas, you also have things like, language barriers, customs you have to deal with, dealing with shipping things in containers.

[00:15:00] But other things I think about okay, well if you got a low ball supplier, everybody else has come in a lot higher, is that low ball supplier gonna give you the same quality of things that you're gonna end up having to pay for again?

Stephen Brown: Usually they're specced out. And as long as that lower end supplier, those jobs spec out to what's required on the project, people will do it. Unless that product, everybody knows whether it's good or not. It depends on what trades you do. I think

Wade Carpenter: Yeah. What were your other thoughts that, were there other areas that we didn't go into on this one or?

Stephen Brown: Now that's just it. Be proactive, think ahead, manage ahead, and then these problems won't happen after the fact. I guess the reason I've been so emotional about it today is because it's just happening so much. And it can be managed. You ensure those materials and supplies, everybody agrees to do that from flood, earthquake, tornado, et cetera, et cetera. Builders risk policy installation, floater policies for the construction site.

You also sign agreements that you [00:16:00] agree to do something with the owner, and then the supplier will not sign the same agreement that helps protect you? That's not equitable in any way, shape, or form. You say I'm just not big enough to be able to control that sort of thing. Okay, you control what you can control and then you price things considering the risk that you might have. You either do the job or don't do the job, right?

Wade Carpenter: Yeah.

Stephen Brown: However you look at it, it can be managed. I just wanted to bring it into everyone's radar that this system can be managed. We talked about the contracts you sign requiring a supply bond on the specific products that are hard to get right now. While you're bidding a job, you just depend on your subcontractor to deal with those materials and supplies, fine. Are you bonding back that subcontractor? What is their relationship? What's their ability to do what you need to do? Because if they can't do what you need them to do, you say I've managed that risk. Not really. You still gotta finish the job. You still gotta [00:17:00] deal with the repercussions of it. So collaboration, communication is key here, isn't it?

Wade Carpenter: Absolutely.

Stephen Brown: And documentation, that's what you said.

Wade Carpenter: Yeah, and if we can, I just wanna quiz you on one more thing before we wrap up here, because say somebody's got a job that's been bonded. What do you do when things start going sideways? I'd like your take on that.

Stephen Brown: First of all somebody threatens a payment bond claim. You're a material supplier. Your salesman has a credit manager, that business manager that has to deal with by the way, we're gonna need a copy of that payment bond form before we issue these materials. But they're the ones threatening you if you are one second late to file a claim on your bond. If you sign an agreement with them and you've tied them down to terms that they are causing the delay, you can't go back with them and make them take responsibility for it, then you haven't done a really good job negotiating with that material supplier, have you?

Wade Carpenter: No, I agree.

Stephen Brown: [00:18:00] Did that answer your question?

Wade Carpenter: I'm just thinking more of if somebody called you up today in a panic because somebody's threatening calling the bond or something, when should you escalate? When should you pick up the phone and call your bond agent?

Stephen Brown: Right away when someone's doing that, because the first thing I'm gonna ask you is, what's going on? What's going on with these materials? How's that gonna affect your ability to finish the job? Are you documenting everything properly? Have you talked to your attorney? What is your attorney telling you? And what are you doing about it? Also letting them know if you've documented everything and it's not your fault, you're dotting your i's and you're crossing your T's, then a bonding company isn't gonna just pay a payment bond claim because somebody threatened to file a claim on your bond. So don't be afraid of that. Payment bond claims are frequently used in our world to try to pressure our customers.

Wade Carpenter: Absolutely. You went exactly where I was thinking, documenting everything, photos, emails, keeping every single thing you [00:19:00] can. If you get a letter or something like that, it's too easy to ignore it. And you want to ignore it. But communicating with everybody, even when things are going bad, those kind of things I think, protect yourself. Especially if you can explain things and document it and not let it go 30, 45 days before you know you address the letter, those kind of things.

Stephen Brown: And you know what I was saying about sign the iPad on their signature box, that's terrifying, isn't it? What are you agreeing to?

Wade Carpenter: Again, when things go sideways. In a particular situation I know we were talking about it turned around, for this particular contractor because he was documented and he was being proactive about the whole thing. What I understand now is it's turned into a profitable change order for him. So it's amazing how these things spin the other way if you are doing the right things.

Stephen Brown: They can have happy endings, can't they? That's what we want for all our listeners, to have happy endings and to think about what you signed, plan ahead, document, and [00:20:00] you'll be good to go.

Wade Carpenter: Okay. If nothing else we'll go ahead and wrap this up. We appreciate you joining us and if you've stuck with us this long, we hope we made you think a little bit about what you're doing on the supply side. The materials and those kind of things that can play a big part in how you finish a job and whether they go right or wrong.

If you got any comments or horror stories or positive stories, we'd love to hear both of them. Put them in the comments below. We do this every single week. We love to hear from our listeners. If you would, also please share, subscribe, all that stuff, it really helps us out and we will see you on the next show.