Watching the market can be helpful

One of the operations that is part of the estimating process is researching the most competitive material prices for a large variety of items. Some sources estimate that in excess of 100,000 individual listings would not be an unreasonable content. Fluctuations can be seen when you have hard-copy updates of your price source. Watching the changes can provide an insight on the various markets that control our materials. Keeping these sources updated and current is a mandatory task, albeit one that is often shirked. The use of outdated prices is tantamount to reading yesterday’s newspaper.

In the 1970s and early ’80s, the silver market was subject to manipulation. Silver may not be a large portion of our materials, but some silver is used to plate contact points in motor controllers. Price increases are easily lost in the overall cost for such small amounts. The same doesn’t hold true for switchgear, where quite a bit of silver is used to plate bus bars. As a result of the speculation-driven market, many manufacturers applied surcharges for boards containing silver plating. The surcharge was a floating value and usually pegged to the commodity price of silver at the time of delivery of the switchgear. The result was that the quoted price used when working on the bid and the one written on the purchase order will have increased by the applicable surcharge.

Silver is not the only metal that has been the subject to commodity speculation; copper has seen many similar gyrations. Contractors usually just up the prices for copper parts instead of a surcharge as with silver.

Most people associate the commodity market with wheat, or pork bellies and the like. The metals commodity market is equally volatile, and this is what electrical equipment producers watch and often base their price increases accordingly. Learning something about this market can come in handy. When I tried to time the market by buying wire on the dips in the copper market, I found I would have been better off running an advisory service to warn that the dip wasn’t anywhere near the bottom and to hold off purchasing until a lower point is reached.

Steel has been in the news quite often recently. No question that this item has and will continue to affect the pricing of conduit. Much of those price fluctuations are due to an ever-increasing demand, particularly in China. Additional factors are the shortages of scrap steel used for making most building products, and the weaker U.S. dollar. Predictions indicate a possible decrease in prices, but the same sources have also indicated lower fuel prices, and we know those costs only too well.

It is most likely a certainty that quotes from suppliers will have some type of legalese in the smallest print possible and probably gray print. The provision will state that they can pass through costs incurred by surcharges, escalations or any other description of price increases. Obviously, the increases should be based on a legitimate expense that could not have been predicted at the time the quote was tendered. Unfortunately, there are few if any provisions in fixed-price bids that would allow the increase to be passed on to the owner. In a recent article I read, a steel company declared bankruptcy as a result of being caught in the rising market. The company’s customers were anxious not lose the provider and some prepaid their quotes, admirable but nothing to depend on in our competitive end of the project.

How to avoid getting caught in the crossfire? Unfortunately, there is no surefire method. A prime requirement is that accurate prices are used at the time of preparing the bid. Over the years, some in the industry have brought forth many systems that in effect would provide prices without referring to any of the usual sources for that information. Those ideas may work well when pricing is relatively steady, or it may work in certain types of work, but overall this is a shortcut that can only lead to disasters and should be avoided.

As pointed out, learning about the markets is a reasonable start to an educated guess as to what may happen with pricing. If any reader has mastered the practice of predicting the actions of the commodity market with a certainty, that reader would be better off to bet the family farm on the market than the electrical contracting industry.

The steel company referred to before was accepting work at cost to preserve its work force, admirable but sadly ineffective. Some of our competitors at times roll the dice and use the same rationale. In an uncertain market, they will not survive. EC

DAVID is a professor of electrical technology at Long Beach (Calif.) City College, a consultant and an expert witness. He can be reached at 562.597.1877 or at edavid@lbcc.cc.ca.us.