Editor’s note: The following consists of a conversation between RCS Multi-media Manager Megan Ellsworth, and Division 7 Roofing’s President John Keisel and Vice President Ryan Resides. You can listen to the podcast or read the transcript below.
Megan Ellsworth: Hello everyone. My name is Megan Ellsworth, here at RoofersCoffeeShop.com and we are so excited, one of our new influencers for 2022 is Division 7 Roofing, John Keisel and Ryan Resides. And we are so excited to have you on as influencers, and really excited to be chatting with you today. The month is January, and this month's topic is material shortages. So how are you dealing with, and what is some of your advice concerning these material shortages for yourselves and for other contractors out there?
John Keisel: Well, hello. I'm John Keisel, president at Division 7 Roofing. Do a little introduction here, Ryan, go ahead and introduce yourself?
Ryan Resides: Hi, I'm Ryan Resides. I am the vice president of sales and estimating for us. Looking forward to talking a little bit about this month's topic.
John Keisel: Perfect. So we've been dealing with a material crisis, material shortage going back 3, 4, 5 years. Now, this has all been perpetuating from stocking distribution to distribution, discontinuing the stocking role of materials, and it became a pass through order taker, and we've seen the relationships start to erode from where they used to be 10 years ago. We used to buy materials based on relationships and who are you, and then I think that roofing contractors that operated that way over the last five, six years have turned the quarter and decided to start pricing projects, not so much or awarding projects, not so much on relationships, but based on price. And us as contractors, I think that we've drove the profitability or drove the margins down because we've changed from relationship buying to price buying.
That being said, so where we are today with the material shortage and what we're seeing as far as strategic opportunities being turned down by manufacturers, isn't a good sign when we used to have people coming in our office daily to get a piece of a large account, a solidifying large portfolios, and they're essentially telling us, yeah, we can't do that. We're going to do allocation, we're going to do this, we're going to do that, we don't know when, and there's not even a strategy in place to when things get better, and securing that relationship somehow they, so that's one of the most alarming things I've seen. If there's not a, when things get better mentality, so pretty concerning. Are you seeing that, hearing that type of rhetoric as well Ryan?
Ryan Resides: Yeah, absolutely. John, it's not looking like there's a light at the end of the tunnel at this moment in time. And as we talk to different manufacturers, we're continuing to hear the same message of, it's not going to get any better this year, guys unfortunately, it's looking like it's going to be a 2023 timeframe before things get back on track. Not what we want to hear, but we better have the reality of the situation so we can make strategic decisions surrounding who we go to and trying to find materials in some places that we may not have before.
Megan Ellsworth: Yeah, wow. That's really interesting. Are you guys starting to do that at Division 7, looking elsewhere and modifying things?
John Keisel: Yeah, so we've been loyal to the major three or four for 30 years now. When we start to get lack of response or no response, not great response, we found ourselves being thrown into the arms of the manufacturers that we used to look down our nose at, and we're finding for us a strategic alliance with some of those manufacturers that want the opportunity and have managed the crisis better by doing things that makes sense that some of the other manufacturers haven't. Strategic order placement you're going to have a 3,000 square job that needs to be shipped, and you have a contractor that needs a 300 square job that needs shipped, talking to the 3,000 square contractor saying, Hey, can we short you 300 square, we need to get this other project off the ground, and they work that, that's been one of our suggestions all along to manufacturers, but I think first you have to have trust in that manufacturer that you're actually going to perform and get that last 300 square, not find yourself out.
So for us, we have found a lot of ability to meet our requirements and our needs to stay in business in those other channels. How this shakes out long term will have to put our seatbelt on and wait and see.
Megan Ellsworth: Wow. Well, that's really interesting that people are saying now it's not till 2023, so that's wow. I'm taken aback by that. That's pretty crazy. Well, any last words on this topic, anymore advice or anything to wrap up?
John Keisel: Yeah, I think one of the key components that's, we obviously are in a material crisis, we're in price, we're in an environment where cost of living is rising, we're seeing all this, so the largest capital expenditure that a building or a building owner is going to experience is the roof. That money, the price escalation of materials is being essentially turned back on us being the consumer.
At the end of the day, we're the ones buying the products, we're the one going out to the store, this money is trickling down to us. So it's not just, oh, the poor building, this poor building owner's going to pay twice as much for a roof this year as what he would've paid last year, it's we're going to pay twice as much for a product that this building uses to facilitate whatever widget is that they make. So it has to participate or it has to collaborate with labor, and Ryan can speak to what we've traditionally seen in the ratio, a material, to labor expense and what it looks like third quarter this year when it comes to the material labor ratio. And I think this should be alarming to people.
Ryan Resides: Yeah, absolutely. John, and you know we've had several conversations about this internally and how we're going to deal with it. So typical general rule of thumb in the roofing industry, even someone who's not familiar with estimating, when you sit down and look at the material list for a job, you're typically in the past going to see something like a 50, 50 split or a 60, 40 split labor to material. Where we are at now, we're starting to see the material component just absolutely take off. So for example, a large package of bids that went out for us recently, we were seeing more of a ratio of 80% of a material, 20% labor ratio. And what this is doing for us is as time goes on and manufacturers are communicating to us, we should be expecting somewhere in the eight to 10% increase per quarter.
A lot of people are thinking, okay, eight times four, 32 or 10 to times four 40, unfortunately it doesn't work that way, it's a compounding effect like interests. So what ends up happening is if we're experiencing eight to 10% per quarter, what that really means is come the end of third quarter of this year, you could be looking at somewhere between 60 and 85% increase overall. So these are really putting a hamper on a contractor's ability to buy material due to the increased cost of them, and I do think we're really going to start seeing some contractors fall off unfortunately in our industry because they simply can't afford to house those costs and carry them until they can get paid. It's going to become very dangerous waters, especially for people who seek a lot of new construction work, where the retainage are held until the end of the project and that's going to continue to proliferate until we see some type of relief here.
So last year we saw project cost on average here at Division 7, from January to the end of last year, go up about 40% overall in general. And we're not seeing any let down there, it looks like it's going to be another repeat of a year. So quite alarming as John said.
Megan Ellsworth: Wow, wow, my gosh, 40%. And that's probably just going to keep going up. Oh, crazy.
John Keisel: But let me piggyback on what Ryan said there and the point that the 80, 20% ratio, the future of that becoming a problem is we're saying that the labor expense isn't increasing within the inflation of the materials, meaning our workforce isn't going to be able to afford to survive in an economy as inflation is going up and we're not sequentially raising up our labor rates. So when materials go up 40% by rights, our labor needs to go up just as much.
But as roofing contractors, as in at large, we're our own biggest enemy because we're still competing against contractors that aren't valuing or thinking about the labor costs, and we're going to cannibalize the industry, and we're seeing it, just last week in a bid situation that people are not valuing the labor like they need to and that's really the issue is the roofing contractors and that's why we're doing this is to put out the message, be smart, be smart for everyone so that we all, or most of us are going to be able to survive this because you are losing out by doing that.
Megan Ellsworth: That's great. And that's a great way to wrap this all up is just, that's the advice that you're saying is be smart, value your workers and just hunker down. Right?
John Keisel: Mm-hmm (affirmative).
Megan Ellsworth: Awesome.
John Keisel: That's essentially the message.
Megan Ellsworth: Wow. Well, this has been great. Thank you so much for chatting with me today. And thank you again for being a part of the 2022 influencers group. Any last words, and then we'll wrap it up?
John Keisel: Well, we'll see everybody at the IRE this year, we're going to be participating with Trent Cotney and Jobba and some educational seminar. We're going to be out there doing things, talk to people. So look forward to seeing everybody at the IRE this year, stay safe.
Megan Ellsworth: Awesome. Well, we'll see you then, and to everyone listening. Thanks for listening and make sure to subscribe.
John Keisel: Take care.
John Kiesel is the president of Division 7 Roofing and Imagine Technologies Group. See his full bio here.
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