Are Your Trade Contractor Relationships Strategic or Transactional?

It’s unlikely the industry will ever be the same after we get through the current labor and material shortages. I know many builders are complaining about how one or more trades let them down during these trying times, trades they considered loyal but that perhaps took on too much work or went with another builder paying a temporary premium.

I know a lot of builders feel they have been taken advantage of in terms of continuous cost increases by trades and suppliers, and perhaps they have. Builders are upset because they have worked with and even sole-sourced certain trades and suppliers that appear to be taking full advantage of a strong market and a supply-chain crisis. As my dad would say, “The tail is wagging the dog” right now.

Some builders I know are keeping a list of trades they feel have taken advantage of them, so they can remember to shun those trades when the market shifts (as it always does) to the builder’s advantage.

I also recommend keeping a list, but instead of a “naughty” list, make it a “nice” list.

Trade Contractor and Supplier Loyalty: Who’s on the ‘Nice’ List?

Honestly, I don’t have high expectations when it comes to loyalty from just about anyone these days. I expect trades and suppliers will do all they can to make as much money as they can, as often as they can.

When a builder can pass on cost increases through higher home sales prices, I see no reason why they shouldn’t continue to work with those trades and suppliers. I believe it’s in everyone’s best interests if installers and materials suppliers are profitable.

However, during a cold or down market, I also expect trades and suppliers to work with me on their pricing when my homes are discounted to sell. Every once in a while there is a trade that has dropped another builder to prioritize one of my jobs, or has shown me their invoices and worked with me to help manage my costs. When that happens, I put them on my Nice list.

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For them, I want to do all I can to return the favor when the market turns and I have the upper hand. So, while other builders will certainly be looking to even the score with suppliers and trades that took advantage of them in the current market, I recommend builders focus on those suppliers and trades that took good care of them and treated them as a strategic partner.

For the rest, consider them nothing more than transactional trades you use to competitively bid categories lacking a strategic trade partner. If they drop their prices enough to win the bid, then use them. Otherwise, don’t. You owe them nothing.

Seriously, stop kidding yourself that all of your trades and suppliers are strategic partners that have your best interests in mind. In my experience, about 5% to maybe 20% of trades feel and act that way. Those are the trades you can grow with in good times and in bad.

Know the Difference Between Transactional Relationships and True Partnerships

Knowing which is which is fairly straightforward. A strategic trade or supply partner operates with integrity. They fulfill the contracts they sign. They share quantity take-offs for the materials they use in each of your homes. They are willing to share their cost of materials at a SKU level, along with manufacturer and distributor names. They competitively bid their materials and make purchasing decisions based on quality, cost, and delivery rather than just “good ol’ boy” relationships. When their costs go up, they only pass on their actual cost increases rather than marking up those increases with fixed overhead that has already been covered or merely to increase their profits.

A strategic trade can be relied upon to use the materials you specify and to honor national contracts with major manufacturers. They prioritize your jobsites over others. If they had to, they would pull labor off another jobsite to adequately staff yours. They deliver high-quality work with fewer warranty issues and have a proven track record of minimal callbacks. They also have lower cycle times and they can complete scopes of work faster than most others.

A strategic trade always completes its scope of work on time and doesn’t leave your jobsite for another before they finish. They promptly respond to your calls, emails, and messages, usually the same business day or early the next. They work well with all of your departments and avoid back-charging for every little extra. Their extra purchase orders (EPOs) for unplanned costs are minimal.

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That’s a long list, right? And a tough standard to meet. But if you find a trade or supplier that checks those boxes, hold on to them and treat them well.

By contrast, transactional trades and suppliers don’t operate the same way as strategic partners. They are out to make as much money as they can when the market is good ... and you’re just another means to that end.

When times are tough, though, they will do all they can to convince you they’re a strategic partner over all others. Don’t fall for it. They would drop you in a New York minute if they could make a nickel more from another builder.

You should think of total cycle costs from trough to peak and keep track of those trades and suppliers that have met the requirements of a strategic partner and integrate them more into your processes. Work with them to reduce cycle time, increase throughput, and improve quality and customer satisfaction while lowering your respective costs.

Don’t try to fit a transactional trade into that box. They may be a necessary cost of doing business, but they will never care about your business like a strategic trade or supplier does. Still, hold no ill will toward a transactional trade, and don’t leave them off your bid list or seek some measure of revenge—just don’t expect too much from them.

A Word to Trade Contractors and Suppliers About Their Home Builder Customers

I would further propose that strategic trades and suppliers take a different view of their home builder customers. Have you ever received a letter from a builder stating they were going to reduce accounts receivable by 10%, in essence reducing your price for work already completed or materials already dropped at the jobsite? It sounds crazy (and grossly unfair), but there are builders that took that tack during the last downturn, and they will do it again when the market turns.

What makes you think they won’t? Sure, they are offering to pay you premiums so you will work on their jobs now, but what happens when the market goes soft? I think you know the answer. Leave that business to the transactional trades and suppliers and find builders that will treat you with the same respect with which you treat them.

I know there is a shortage of almost everything these days. I feel the pain just as you do. But keep in mind that these bleak times won’t last forever. And you will get through this smarter and more experienced than you were before if you learn from these conditions and make adjustments for the future.