Framing the Cost: What U.S. Tariffs Could Mean for Home Builders

Home Builder Solution discusses the impact of tariffs on home builders and suggests strategies to maintain profitability.

According to a CNBC article, the mortgage demand has dropped nearly 13% as interest rates hit a 2-month high. These higher interest rates, coupled with general concern over the current economic climate, have potential homebuyers worried about the future economy and stock losses.

The economic concerns and sharp decline in mortgage application volume are proof that residential contractors will need to sharpen their pencils to attract a smaller pool of buyers.  

So, what about you? Is your business future-proof, ready to withstand the inevitable challenges we now face and the repercussions to follow that will affect your bottom line?

When market conditions shift, businesses have three main strategies to maintain profitability:

1. Increase Price: Limited flexibility due to already high home prices and mortgage rates.
2. Increase Production: Can increase profitability if demand remains strong.
3. Controlling Costs: The most proactive and reliable strategy.

In today’s economic climate, raising home prices to protect your profitability could backfire. With interest rates still high and housing affordability already stretched, many potential buyers are priced out or extremely cautious. Increasing prices risks slowing sales even further, especially as inventory rises and competition grows.

Increasing production might be on your horizon, but with the market shrinking, this path must be coupled with cost control, so that you can competitively price your homes. To do this with minimal effect on overhead, you need a plan to reduce your cycle times and release the resources (human, equipment, financial, etc.) quickly to facilitate the next build.

Controlling costs should always be at the forefront of your business plan. Proactively controlling costs isn’t just about cutting expenses; it’s about protecting margins, improving forecasting, and preventing cost creep.

• Gross Profit Margins (knowing vs controlling): Knowing your margins at closing is too late. You must control them from the start to ensure sustained profitability.
•  Accurate Business Forecasts and Predictability: Controlling costs allows you to forecast earnings, evaluate marketing effectiveness, and make data-driven business decisions.
  
  
• Prevent Cost Creep: Small cost overruns add up quickly, especially if vendors adjust pricing unexpectedly. Without proactive control, you risk losing thousands per build without recourse.

The good news is that there is a proven, well-known solution to cost control – one that is often thought of as an unrealistic dream in home construction.  The truth is that this common business tool, widely used across all industries, must be embraced in order to overcome uncertainty in your future.

Purchase Orders are your best business ally and are easier to implement than you think.

What is a purchase order? If you think of a work order as an order for work, a purchase order is an order to make a purchase. A purchase order is a binding contract between you and a vendor that:

1. Details either work or materials you need the vendor to provide.
2. States the amount you are agreeing to pay once the request is complete.
3. The date on which you expect the work to be completed and/or material delivered.

The best practice is to create purchase orders that include one or more work orders with the agreed-upon pricing. This helps eliminate inconsistencies and potential confusion. A purchase order serves as a communication tool between you and your vendor, outlining the terms of your business agreement. When the vendor approves it, they are confirming their agreement with your understanding.

Purchase Orders and Vendor Invoices :: Why Invoices Alone Aren’t Enough

Using purchase orders ensures that vendor invoices match pre-approved costs, preventing surprise overages and protecting your bottom line.

Invoices are reactive, often arriving after work is complete, leaving builders with little recourse against unexpected costs. Without purchase orders:

1. Vendors control pricing instead of builders
   
   
2. Profit margins remain uncertain until closing
   
   
3. Forecasting future profits becomes unpredictable
   
   Purchase orders don’t replace invoices — they define them. When used properly, the amount due on an invoice should match the corresponding purchase order. If it doesn’t, it raises a red flag and alerts the appropriate people before the invoice is paid.

Adding purchase orders to your process does not have to be disruptive. Let’s compare these two processes to better illustrate the differences:

Phase	Using Pos	No Pos	Comments
Accurately Estimate Project	X		Includes initial mark-up for homeowner pricing
Set Budget	X	X	Establishes cost targets to protect margins
Build Schedule	X		Assigns work to vendors with clear expectations
Submit Bid Request	X	X	Establishes vendor pricing ahead of time
Issues Purchase Orders	X		Establishes expectations with vendor on pricing, scope of work, and timelines
Vendor Approval	X		Ensures vendors agree to pricing and scope before work begins
Match Invoices	X		Ensures invoices match pre-approved amounts
Track Cost Differences	X		Without POs, vendors dictate pricing after the fact
Pay Vendors	X	X	Using POs ensures accurate payments

 

Common Objections to Purchase Orders

Home construction, with all the different disciplines and in some cases complex material applications and processes, definitely makes it a unique industry. It’s easy to be persuaded that costs are a moving target and controlling costs proactively just isn’t realistic in this industry as it is in others. In reality, it only seems that way.

In no other industry are purchase orders more useful than in home construction. Just the smallest percentage increase in cost often has a major impact on margins and can mean the difference between running an unsustainable cash-flow business or one that guarantees true profitability regardless of the economy.

Here are a few common objections, along with some helpful constructive considerations, home builders often have to using purchase orders:

1. It’s just too much work for us to handle.
   
   Adding purchase orders and vendor pricing management to your plate can indeed add some additional work, but not as much as most believe. If you currently create bid requests to get all or most of your pricing, then you can continue that practice using package pricing unit types. A package price is simply a price per package that your vendor supplies without sharing the take-off or detailed line items. This can then be used for your internal billing items from which you create purchase orders. This approach typically requires no additional work and still gives you a guaranteed vendor price.
   
   However, to get the most benefit from purchase orders, you’ll want to work on your relationships with your vendors over time to establish quantity pricing that can be used for any project moving forward. This eliminates having to create so many bid requests, but more importantly, is much more precise; allowing you to do/verify the take-offs and eliminating more costly mistakes and omissions.
   
   In the long run, POs actually reduce work by preventing pricing disputes and budgeting errors.
   
   
2. My vendors don’t accept purchase orders.
   
   Reliable and talented vendors are very important, but the truth is that they work for you. They don’t accept purchase orders because they go against how they prefer to run their business. They don’t want to be held to a price they had to set weeks or months before they do the work. However, a well-structured process benefits them by ensuring clear expectations and faster payments.
   
   
3. I can’t always know an exact quantity in advance.
   
   This may be true in some cases and might seem like a reason to avoid using purchase orders altogether, but it’s not. As mentioned, allowing a vendor to set the price after work is completed gives them control over your profit margins. More importantly, it limits your ability to forecast costs and proactively protect those margins.
   
   That said, in certain construction scenarios – like exterior coverings or concrete – it’s difficult to know the exact quantity upfront. If your financial or management system requires an initial quantity to control costs, you’ll need to estimate it, then submit a variance purchase order (VPO), which must be approved, to reconcile any differences.
   
   However, with a more advanced software system, you can handle this seamlessly using vendor quantity allowances. This feature lets you create billing items with predefined units and a maximum quantity allowance. The vendor then provides the actual quantity when reporting the work as complete. Once verified and the purchase order reaches accounts payable, the correct quantity and pricing are already in place, eliminating the need for a VPO workaround.
   
   
4. I trust all my vendors; I’ve worked with them for years.
   
   That’s great to hear. Tough times can certainly test human nature, but most reasons for using purchase orders have little to do with dishonesty or questionable pricing. The reality is: everyone makes mistakes, and in this industry, even small errors can have big consequences. Fortunately, with strong vendor relationships, most are more than willing to establish the quantity pricing you need to operate efficiently and successfully.
   
   At the heart of it, purchase orders are about cost control and accurate business forecasting. Even with the most reliable vendors, if you don’t know the price until the invoice arrives, these critical functions – on which businesses everywhere depend – are reduced to guesswork.
   
   
5. My business just doesn’t work that way.
   
   You’ve probably heard the famous quote, “Insanity is doing the same thing over and over and expecting different results.” So many of us seek solutions but aren’t willing to change what we’re doing to overcome current obstacles. No one wants to fix what isn’t broken, but sometimes the solution to what is broken doesn’t lie on the surface.
   
   Controlling costs cannot be effective when attempted at the backend, and trying to do so only creates ill will with your vendors. This is ultimately more damaging than implementing any new business practice. Every vendor you’ll encounter will have at least heard of purchase orders, granting them immediate credibility. A brief explanation of their importance should eliminate any pushback.
   
   If cost overruns are a problem, your current system isn’t working. Change is necessary to protect your profitability.

 

The bottom line is that change is constant, and preparation is essential. With potential trade levies on countries like Canada and Mexico, having reliable strategies in place is more important than ever.

Cost control is critical in any business, and its importance cannot be overstated. This is precisely why purchase orders were developed and why they remain a cornerstone of sound business practices for successful companies around the world. The sooner your home construction business adopts them, the sooner you'll begin to see their benefits in efficiency, accuracy, and financial stability.