In the world of contractor building material suppliers, a company provides products and services to a contractor and then, within a specified time (usually 30 days), the contractor pays for the materials and/or services. It is customary that the price is agreed upon before shipping, and the only time there's an adjustment to the bill is when the supplier makes an error to warrant a price change. However, in today's economy, this is not the case. Dealers and suppliers have entered an era of "forced negotiations," which threatens to bankrupt and destroy the balance sheets of many well-operated suppliers.
Let me first define "forced negotiations" and how they affect the marketplace today. For many commercial and residential builders, the amount of work available is at historic lows. In Ro-Mac Lumber's area of Lake County, Fla., permits have been down as much as 90%, and the glut of foreclosures have dramatically slowed the new home marketplace even further by destroying appraisals. This puts the owners of potential new projects in the driver's seat, and oh boy, some of them have been driving builders, suppliers, and subcontractors right off the cliff to disaster.
Commercial and residential builders and subcontractors have become so desperate to get any job they can that many of them are bidding projects below actual cost. They've allowed project owners to draw a correlation between a new project and a distressed foreclosed property, which is unrealistic. I'm going to say this fact out loud: In Florida, you cannot build houses or commercial projects at the prices foreclosures are being sold at today.
Dealers and suppliers are just as desperate as the contractors they are selling to. As a result, they lower the price of their materials to negative cost-covering levels in order to get the job. If everything goes right, the first big problem for contractors and suppliers is they will probably lose money on the job or break even at best. That is a big "if" when you have overzealous project owners in the driver's seat. A commercial general contractor told me recently that most are bidding projects with raw material and subcontractor pricing with no mark-ups for profit or problems. His strategy is to beat those providers down to make a profit.
The project owners begin to make unrealistic demands or changes with the contention others made the mistake, and now the project has become a huge losing proposition for the contractor. In turn, the contractor squeezes the subcontractor and dealer to make concessions they are unable to make, and now the conflicts begin to surface. All of a sudden, everything the dealer has done is wrong.
I recently spoke with a large commercial products supplier who lamented some of the same issues we were having with commercial projects--at the end of the project, everything is now a "forced negotiation" in order to get paid. Dealers can provide the material as specified by the project and contractor. But suddenly, at the end, make-believe problems appear for the purpose of not paying.
An owner changes a specification--it's your fault. An item is stolen from the jobsite--it's your fault. A subcontractor improperly installs a product--it's your fault. The architect makes a huge mistake--it's your fault. And worst of all, we don't have enough in our draw--it's your fault for not value engineering.
Some of you might say, "Lien and sue the contractor and owner for your money." This sounds good, but there are two problems with this: Everyone needs their cash now, and filing a lien or claim on a bond on a project with no money available is costly with a low chance of collecting. In other words, they've got you cornered, putting you into a "forced negotiation" situation.
Recently, a long-term residential builder customer of Ro-Mac Lumber became past due on a $9,000 bill. When I called him about it, he said the bank had lowered his appraisals and was unwilling to disburse any more money. We contacted the bank and confirmed that the builder and bank were, indeed, in a conflict as to the value of the house and terms of the loan. You'd think Ro-Mac Lumber was in good shape to collect these monies because we followed Florida's odious lien law to the letter, and we had a lien in place that should guarantee our payment. On the contrary, it guarantees nothing.
In the last two years, liens in Florida have been greatly devalued because with the decline in the housing market most people owe more than what the project can be sold for. A lien on a house with a $200,000 construction loan is tricky in a declining home value market. Mr. Banker's lien will wipe out all other lien holders if payment is not made.