Plenty of ink has been spilled about the record increases in construction material prices and labor shortages of the past couple of years. Even before the pandemic, the industry was facing a labor shortage and rising prices. Yet COVID-19 and its many knock-on effects have worsened both of these issues. Everything from supply chain disruptions to red hot housing demand and a dearth of available workers is directly related to the pandemic.
The good news is, that while no construction company has faced a pandemic like this one, Stronghold Engineering Inc. and many other contractors have navigated severe crises in the recent past. More than any other industry, the Financial Crisis of 2008 tested the resolve and resiliency of the real estate and construction industries.
Of course, this is a different challenge that requires a different approach. Not all businesses will survive. Even fewer will thrive. The key, as Stronghold Engineering Inc. has said before, will be a flexible approach that enables organizations to assess and adjust to the challenges it faces. The first step in that approach is a deep evaluation of the situation at hand.
Materials Price Increase Reports
Year to date, as of July 2021, overall building materials prices had increased 13 percent. For context, the average increase in the price of building materials in the same period each year from 2015 through 2019 was 1.2 percent. That means the average change in the past four years over the same period was less than one-tenth of 2021’s gain through July.
In August, overall building materials prices, as indicated by the producer price index, increased another 0.7 percent. Mercifully, the August increase was less than July’s increase but still exceeded the Dow Jones estimate.
For design-build contractors like Stronghold Engineering Inc., materials price increases tighten profit margins and reduce market demand. So it’s not enough to skim the headlines. Contractors need to know why these price increases are happening so they can foresee and adapt to potential changes in the situation.
Root Cause Analysis
The most consequential materials price increases are for lumber, steel, concrete, and gypsum. With some exceptions, the underlying causes for these materials’ price increases are similar.
The onset of the pandemic ground production of construction materials to a halt. At the same time, demand for lumber, gypsum, and concrete spiked due to demand from DIYers and the housing market. This simultaneous demand and supply-side shock sent lumber and other material prices soaring. However, the supply constraints were alleviated as manufacturers came back online after the initial shock of the pandemic eased.
Still, demand for materials remained high and, in some cases, increased. A large portion of the population moved from cities into larger homes in more rural areas. On top of that, people redirected their spending from experiences to household goods such as at-home office furniture, refrigerators, and other goods requiring steel, lumber, and plastic.
Making matters worse, while lumber production ramped up to exceed previous year’s output, other material producers lagged. In particular, plastic manufacturing took a significant hit due to an above-average hurricane season. And steel mills were much slower than lumber producers in ramping up production.
Beyond the challenges specific to construction materials, there are also major supply chain disruptions that affect contractors’ ability to fulfill orders. As Forbes reports, “Massive dislocations are present in the container market, shipping routes, ports, air cargo, trucking lines, railways and even warehouses.”
So it’s not just a matter of paying high prices for materials; it’s also a challenge just to get those materials to the jobsite.
Adapting to a Complex Environment
The magnitude and complexity of construction materials price increases may seem like an insurmountable challenge for contractors. Yet industry leaders like Stronghold Engineering Inc. are showing that it’s possible to continue to grow. In 2020, Stronghold completed 37 projects and earned several awards for its dedication to construction excellence and safety in the workplace.
Stronghold Engineering Inc. has maintained its steady growth by continuing a tradition of commitment to innovation that started decades ago. Among other investments, SEI’s execs see the following opportunities:
- Using drone technology to reduce the cost of surveying.
- Upgrading communication technology to streamline survey and material quantity updates.
- Eliminating downtime and waste with improved equipment, inventory, and process monitoring.
- Reducing absenteeism due to illness or injury by upgrading worker safety processes.
In addition to following the lead of trailblazers like Stronghold Engineering Inc., legal-savvy contractors can use their contracts to protect themselves from materials price increases. Specifically, contractual language called price escalation clauses create a mechanism by which the contracted parties agree to estimated prices then adjust based on actual costs.
With this legal structure in place, contractors are at least partially protected from price increases that occur after they’ve submitted an estimate.
Additional Challenges for the Construction Industry
Unfortunately, materials price increases aren’t the only challenge contractors and the rest of the construction industry face. Labor shortages, another problem that predated—and was exacerbated by—the pandemic have throttled many firms’ ability to meet surging demand.
Yet in many ways, construction organizations can meet this challenge at the same time they tackle materials price increases. Better utilization of technology and streamlined processes will help companies stand out to the limited number of skilled laborers available. Also, flexibility to new approaches to developing and retaining employees will be a key differentiator. Here again, Stronghold Engineering Inc. provides an example, with their latest class of four employee-graduates of the ABC Southern California Chapter Apprenticeship Program.
At the same time, individual organizations can only do so much in the face of such stiff headwinds. For instance, in regards to supply chain issues, proactivity can help mitigate disruption and unexpected expenses. But the larger complication inherent to the current supply chain will take time to resolve. And contractors will be wise to understand that overambitious investment can have diminishing returns. Plus, given the natural boom-bust cycle of the construction industry, some situations may demand a more defensive, wait-it-out approach.