Rapid fluctuations in material prices pose a financial risk to contractors. Donna Ward, managing director of TSI Luckins, explains the reasons for this and suggests ways of minimising it.
Of the many issues that contractors now face in the current economic climate, one of the most challenging is the volatility in material prices. Rapid fluctuations in prices pose considerable financial risk as a quotation can become out of date in a matter of a few weeks.

Keeping track of prices in the most efficient way possible, therefore, is now a necessity that contractors cannot afford to ignore. The most effective way to do this is to align the pricing data held in contractors' and merchants' databases, take full advantage of electronic price updating services and ensure the data is harmonised with the contractor's estimating and procurement software.

To put the current challenge into perspective, during 2008 we saw 18% growth in the volume of price changes issued to our customers, compared with 2007, which was itself a record year for its frequency of price changes. Rather than prices changing just once a year, as was the norm pre-2007, the average number of price changes per annum is now nearer two; with some manufacturers' prices changing even more frequently.

Furthermore this figure reflects only changes to the manufacturer's price and does not include hidden price adjustments arising through the re-negotiation of buying and selling discounts.

This is largely because of the volatility of raw material prices. The products affected tend to be those of a relatively non-technical nature but with a high steel, copper or plastic content. Steel prices rose steadily by around 50% during the first half of 2008 peaking in July and this had a direct effect on the prices of a wide range of HVAC products. A similar situation has been seen with the fluctuations in copper and oil prices affecting pipe and plastics prices respectively.

And as if that weren't enough, in recent months a further factor has come into play. The weakening of Sterling, particularly against the Euro, has resulted in an increasing volume of price adjustments from manufacturers importing products from the eurozone.

All of which means a building services contractor when quoting now runs the risk of having to work with quite different prices when the contract begins a few weeks or months down the line.

This is because most quotations are submitted on a fixed price basis and the contractor has to try to anticipate future material price fluctuations in the estimate. Failure to do so accurately may result in losing the job by quoting too high; or winning it and running at a loss through quoting too low.

As noted above, the trade pricing system used by most UK building services contractors offers a number of advantages in this time of rapidly changing prices. Most wholesalers and merchants now use some form of computer system for sales and purchase order processing and stock control. Similarly, the majority of medium-sized and large building services contractors use computerised estimating and, increasingly, procurement systems.

Trade price updating service

All of these systems contain a database of product and price data, maintained in line with manufacturers' price changes by an efficient third party trade price updating service. This has the effect of closely aligning the pricing data in both contractors' and suppliers' databases.

However, for total efficiency, there still remains the problem of sharing that information between different types of database and software. Each merchant tends to group products slightly differently for applying customer discounts, so entering this data into the contractors' computer systems presents an administrative headache to both parties and can result in incorrectly priced orders and delays in payment if errors occur.

Recently, a number of pilot projects have shown that the answer lies in a unique product code such as the EAN Code or Luckins' TSI Code, which is held in both the contractor's and supplier's product databases. This enables discount data to be output at individual item level by the supplier's system and then uploaded into the contractor's system.

Since the discounts are transferred electronically, there is no problem with data held at individual item level, so the supplier retains complete freedom in applying discounts, while the contractor is relieved of the burden of manually keying the data in.

Given the rapidly changing world in which our industry is now trying to operate, it is vital contractors take measures to ensure they are able to respond equally rapidly. Tapping into electronic pricing databases, which are far more responsive than the book-based systems still favoured by some, is an extremely sensible step that cannot only minimise the risk to your business but will also help you to work more efficiently and profitably.