Light detection and ranging, or LiDAR, effectively produces products spatially characterizing both terrain and vegetation structure; however, development and use of those products has outpaced our understanding of the errors within them. LiDAR’s ability to capture three-dimensional structure has led to interest in conducting or augmenting forest inventories with LiDAR data. Prior to applying LiDAR in operational management, it is necessary to understand the errors in LiDAR-derived estimates of forest inventory metrics (i.e., tree height). Most LiDAR-based forest inventory metrics require creation of digital elevation models (DEM), and because metrics are calculated relative to the DEM surface, errors within the DEMs propagate into delivered metrics. This study combines LiDAR DEMs and 54 ground survey plots to investigate how surface morphology and vegetation structure influence DEM errors. The study further compared two LiDAR classification algorithms and found no significant difference in their performance. Vegetation structure was found to have no influence, whereas increased variability in the vertical error was observed on slopes exceeding 30°, illustrating that these algorithms are not limited by high-biomass western coniferous forests, but that slope and sensor accuracy both play important roles. The observed vertical DEM error translated into ±1%–3% error range in derived timber volumes, highlighting the potential of LiDAR-derived inventories in forest management.