Choosing Your Supply House
Since most installers only deal with a supply house when picking up materials, many new contractors aren't familiar with:
Setting up accounts
Lines of credit
Ordering materials
Negotiating pricing with the sales rep or branch manager.
So today, we'll walk you through these topics to make choosing your supply house a much easier task. Although you might want to open a notepad or a Word doc for writing down notes, don't worry, I'll wait.
Ready, let's get started!
Setting Up Your Supply House Accounts
Depending on your trade, a single supply house could carry all the supplies and materials you'll ever need. Or, maybe your work requires materials from three different material suppliers, a range of specialty fasteners, and a unique silicone paint to complete. If you fall into the latter group, simply repeat the process for each supplier or vendor needed for you to complete your work.
While every supply house is slightly different from the rest, they follow the same basic process for creating new business accounts.
Step One. Complete their new account application
Provide all your business information, as requested by the application. For example, besides the usual name, address, and phone number boxes, the form may ask for:
Personal and business references
Business banking information
Contractor's license number
State/local business license
Reseller permit
Possibly a copy of your bond and contractor's insurance policy
The branch or account manager may want to have a conversation to learn more about your business, like your personal trade experience, project types, cash flow, and available labor/workforce.
Since a new company has no credit history to check, you'll have to authorize the supply house to check your credit score during this process. Since you and the company are essentially the same people, your payment history is the best indicator of how well your new company will pay its bills.
If your credit is less than stellar, this fact doesn't mean that the supply house will refuse to do business with you.
Instead, one of the following will most likely happen:
You may need to find a co-signer (with better credit). But if you're late or miss a payment, the supplier will contact the co-signer to get paid.
You'll probably not get the best pricing right out of the gate. Once you have established a payment history with the supply house, your pricing should improve.
The supply house can decide to set a credit limit on your account. Once you hit that limit, you might not be able to get any more materials until you pay that balance down.
If you're not sure about your credit score, use one of the free credit score checker sites and see what's in your credit file. If you find inaccurate information, contact the reporting agency and request them to correct your file.
If you still can't get past the credit hurdle to open an account with the supply house, we have another option, the joint-check agreement.
In this scenario, which I believe is only available to subcontractors, the supply house essentially becomes your business partner, and here's how it works:
The general contractor signs an agreement stating that they will issue any payments made to your company to BOTH your company and the supply house names.
You then walk the payment into the supply house, where you and the supply house manager both sign the check.
The supply house will then total your materials for the project and write you a check from their account for the difference. Then they will deposit the properly endorsed check into their account.
You have a contract for $10K of work and a JCA with the supply house.
You finish the work and receive a joint-check for the full $10K.
Your total material costs come in at $2500, and you walk out with a check for the difference, $7500.
Using the same scenario, you missed some materials when assembling your bid. Your material costs add up to $5000, so the check the supply writes you is only for $5000.
I used a joint-check agreement for the first three years of my business. While having the supply house for a business partner might not sound like a great idea, there are several perks!
Should you have a slow-paying general or owner, a call from the supply house looking for payment will get their attention.
The chances are that general has an account at the same supply house. A GC won't want to risk his non-payment to you affecting his availability to get materials or his credit rating.
The supply house has the right to file a materials man lien against a project for non-payment. Nothing gets an owner or lender's attention faster than seeing two liens filed against their project. Imagine how quickly they'll be reaching for their checkbooks!
Step Two. Understand their paperwork system
The supply house will not change its accounting systems to accommodate your pricing, billing, and invoice preferences. Instead, align your paperwork to work within their established system to save yourself valuable time and energy every month.
Start by creating a project numbering system for your business, and then stick to it. For example, here is the numbering system I used as a contractor.
Assign a letter value to the year you started your contracting business; let's go with the obvious choice "A." Every project you begin in year one begins with A, every project in year two would start with a B. Third-year project numbers will all start with a C.
Since you probably don't want your first project number to be A-001, start counting from 100 for the second component of your numbering system. Now, put the parts together to assign your first project number, A-101.
You can add other info, like the project name: A-101 Foundryy Office Complex, to fill in that real estate on the folder tab.
But simpler is better (and much easier to remember) when racing between a job site and your office while placing a material order for tomorrow morning on your cell phone. (hands-free, of course!)
Now that your job files are in order, it's time to set up a new job account and place a material order.
Again, every supply house is an individual business, and they may have specific forms and procedures to follow. Or they may ask you to send them an email with the project info and details.
So here is the project info you need to provide for every new project.
Your unique job number
Project name and complete address (found on blueprints)
Project owner name, address, and phone (also usually listed on the blueprints)
General contractor name, address, phone, and point of contact (check your contract)
Lender's name, address, and point of contact (usually on the contract, may have to contact the GC or Owner directly)
The reason for providing this information is that the supply house can submit a preliminary notice (sometimes called a prelim or 20-day notice) to protect their lien rights if they don't get paid.
Yes, material suppliers are subject to the same prelim requirements as contractors or subcontractors. In addition, you must notify the required parties via certified mail within twenty days of providing material or labor on a project. If you don't submit a timely prelim notice to the parties necessary, you can't file a mechanics lien later.
You can check out our burn story article or podcast, where we discuss the importance of prelims in greater detail. (insert appropriate links)
With the prelim stuff done, it's time to place your material order. Some people prefer using POs (Purchase Orders) to track material purchases, while others hate them. I never used POs since I was an owner/contractor/installer and did all of the material ordering for my business.
Again, there are countless ways to do this, but ask the supply house about their preferences. It's much easier to join their established process than create your own.
Each line item on the material list should include Quantity - Unit - Manufacturers catalog/part number - Brief item description.
3 cartons #424 USG heavy-duty 4" tees
1 carton #DXL24 USG heavy-duty main runners
18 pcs #M7 USG standard wall angle
1 bucket #ACM7 perimeter clips
1 box #30250 (12 tubes) USG Sheetrock Acoustical Sealant
2 bundles #12SA08 12-gauge soft annealed wire 8' length
Looking at the example above for some USG suspended ceiling materials, you should notice a few things besides that the list followed the directions.
Some of the units are different from each other. We've got cartons, a box, a bucket, and a couple of bundles.
But why?
Because that's how an acoustic supply house inventories and sells the materials for ceiling contractors.
A bundle of wire contains 100 pieces of wire
A bucket of ACM7 clips has 100 clips
Mains and cross-tees come in cartons
Including the product numbers and descriptions should help eliminate any confusion at the customer counter. Depending on your trade, your materials may get counted by the sheet, pallet, spool, stack, bag, yard, ton, skid, roll, gallon, or?
Make sure you understand the difference between different unit sizes of the same product.
You can buy a "box" of drywall screws. The plastic container or box (probably) includes 100 pieces. Or you can buy a "carton" of drywall screws which consists of 8,000 screws.
The box of screws would cost less than $10; a carton of screws could set you back $70.
Step 3. Understand the project billing process
Most supply houses invoice by the month. So, for example, the January bill you receive in early February will include any purchases made from the first through the thirty-first. Sounds pretty simple, right?
Imagine you have a project that receives two separate material deliveries within the same month. The first delivery occurred on the fifth, and the other delivery happened on the thirtieth. You expect to invoice and collect payment for both material deliveries as you prepare your billing. You get paid, and you pay the supply house, easy-peasy.
Not so fast. Unfortunately, most (and I'm speaking from west coast experience, your actual mileage may vary) lenders use a slightly modified calendar, so let me explain.
Typically, construction lenders require general contractors, who then require their subcontractors to submit billing, projected through the end of the month; by the 25th of the month.
No, that's not a typo. But, yes, that is how it works (see disclaimer above).
You prepare your billing, including the material delivery from the fifth, and submit it. Then, for whatever reason, you need more material on the job, and it arrives on the thirtieth.
The supply house expects to receive your payment for two deliveries, but your invoicing only included one. If that second delivery totals a few hundred dollars, you can probably cover that without much problem.
If that second delivery totals $5,000, that could be a massive problem for your bank account.
If this scenario repeats itself too many times, you could quickly find yourself in hot water with your supplier. In addition, any unpaid balance due to the supply house will begin accruing interest and possibly a late fee charge to boot.
The lesson here is to avoid the billing dead zone of the 25th through the end of the month. Instead, always schedule your material pick-ups or deliveries between the 1st and the 23rd of any month. Yes, that's two days before the regular cut-off date, but this gives the supply house two days to update all your job accounts. The information will be accurate every month when you call in for totals to prepare your billing.
Step 4. Understand your pricing and project quotes
Thanks to the steel, wood, and cement material shortages caused by the pandemic, many supply houses have moved to a "quote by project" pricing system.
After completing your takeoff, you assemble a material list for the project and send it in for a quote. The system saves hours of phone time, and you can do most of it via email. The timestamp is a bonus, too. Once you have the material quote, you can plug in the numbers and finish your bid.
Most supply houses assign their customers to a tiered-pricing structure that looks something like this:
List - this is the full retail price with no discount whatsoever. If Joe Blow walked in off the street and wanted to buy 10 sheets of drywall, he gets charged the list price of $10 per sheet, spending $100. The following random customer pays the same price.
List -10% - this is the starting point for most new contractors. Those same 10 sheets of drywall only cost you $90, putting $10 back into your labor or profit column.
List -20% - those 10 sheets of drywall now cost you only $80; after establishing a track record with the supplier, the discount grows slightly. Better material pricing can lead to more successful bids for you and more drywall sales for the supply house.
List -30% - those same 10 sheets are now down to $70 for this contractor. This company probably buys most of their supplies and material from this supply house, paying their bills on time.
Are you not impressed by the numbers? Let's run through those numbers again, but let's add a few zeroes and see what happens.
Instead of an example with $100 of materials, let's make the list price $10,000 and look at the numbers:
$10,000 full list price
$ 9,000 list minus 10%
$ 8,000 list minus 20%
$ 7,000 list minus 30%
A $3,000 difference should grab your attention, but let's add a few more zeroes. First, you guessed it; the list price is now $100,000 for a project.
$100,000 full list price
$ 90,000 list minus 10%
$ 80,000 list minus 20%
$ 70,000 list minus 30%
Now let's imagine we have two contractors going after the same project.
Contractor A is still relatively new and is on the list minus 10% pricing. At the same time, contractor B has been around for a few years and is on the list minus 30% pricing level.
Assuming they pay their employees the same wage and use a similar profit margin, who do you think will get the job?
Probably Contractor B for two significant reasons:
He's nearly $20K cheaper
He's got more contracting experience
So, does this mean that Contractor B will always get the project over Contractor A?
Absolutely not!
At some point, Contractor A will get to the list minus 30% pricing level. Depending on your trade and location, this process could take a few months to a year or more. And don't worry too much about Contractor B. While he may have gotten this contract, he is busy fighting off all the other contractors on the minus 20 and minus 30 pricing levels.
Contractor A can establish themself by going after projects that Contractor B doesn't pursue. You can avoid their material pricing advantage until your pricing improves and levels the playing field.
Another essential part of the pricing process involves delivery and stocking charges. Some supply houses consider "delivery" to mean their truck is on-site, leaving you responsible for unloading the materials and taking them inside the building. You might also be liable for any needed equipment, like forklifts or pallet jacks.
Others consider delivery to mean materials taken just inside the building, so it's not left exposed to the weather. In this scenario, the supply house trucks usually tow or carry a small forklift, allowing them to unload palletized materials quickly and get them inside.
Many supply houses now offer a "stocking service," where a team of stockers (laborers) unloads the truck and distributes the materials in different building areas. All while your team of employees continues working. Don't mistake thinking that the stocking fee for 100 sheets of drywall on the first floor is the same for drywall going to the second floor or beyond.
You'll also want to ask if they have a "fast pay discount" option to help lower your material costs. Most vendors bill around the 5th, with a due date near the end of the month. If you can make your payment by the 10th or 15th, you get to deduct 2 or 3% for paying early.
If you only purchase $10K of material each month, the discount puts $200 x 12 months = $2,400 back into your pocket.
If you purchase $100K of material each month, the discount will be $2,000 x 12 months = $24,000 back into your pocket. Therefore, always aggregate your numbers to see the big picture when discussing material costs.
If you have any questions about choosing your supply house, send them to us via our contact form.
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