You’re looking to hire a framing contractor to frame houses for you and you plan to build 45 over the next 2 years. The market is picking up and framing prices have been and are continuing to increase and there is a limited supply of labor. This framer currently has a competitive price and comes highly recommended. Pre-vetting for all standard qualifications was completed before contracting the framer. Once starting construction, it is revealed that the framer is missing a piece of equipment that meets occupational health and safety requirements, preventing them from starting work. The framer does not have the liquid capital to purchase the equipment before starting his first house.
Average market framing rate: $15,000/unit
The market has seen an average increase of 10% every 3 months, and that is not expected to change.
This framer can frame for $13,500/unit
The average time to complete a unit is 3 weeks.
Payment terms to this framer are net 30 or 5/15
Required equipment cost $5000
Make any reasonable assumptions based up your knowledge for any information not given. Provide as many pages of documentation, tables, and analysis as required.
Questions:
A. Do you proceed with this contract, and if so, are there any changes that need to be made?
B. How would you proceed if your projected starts increased to 45/year?
C. How would you react if the average market for framing dropped and stabilized to $13,500?