The construction industry is currently experiencing an unprecedented mix of steeply rising materials prices, snarled supply chains and staffing difficulties. Meanwhile, slumping demand is keeping many contractors from passing on their added costs. This combination threatens to push some firms out of business and add to the industry’s nearly double-digit unemployment rate.
All of this is happening just as the industry is emerging from the worst effects of the COVID-19 shutdowns and project interruptions around the United States. Although Oregon’s construction industry was able to remain open and continue working through 2020, owners, contractors and suppliers in our region are not immune from the economic problems that are now starting to show.
This situation poses an immediate threat to contractors from fast and steeply rising prices for materials, both for projects that have already been bid or started and for preparing-price or guaranteed-maximum-price bids.
Since April 2020 the prices of all materials and services used in nonresidential construction have collectively soared nearly 13 percent. Meanwhile, bid prices have remained virtually stable, rising only 0.5 percent from April 2020 to February 2021. Numerous materials have risen even more steeply in price.
For instance, the national average retail price of on-highway diesel fuel climbed from $2.80 per gallon on February 8 to $3.19 on March 22 – a rise of 14 percent in just six weeks, according to a weekly truck stop survey posted by the Energy Information Administration. Private price-tracking services have reported similarly steep increases for a variety of steel, lumber and engineered wood products.
Given that materials often represent half of the cost of a contract or more, such an increase could easily wipe out the profit from a project and create severe financial hardship for the contractor.
Additionally, delayed deliveries, higher expenditures for personal protective equipment and other sanitation measures, and shortages of employees or subcontractors’ workers on jobsites due to coronavirus impacts are all driving up contractors’ costs. In some cases, project completions are being delayed, meaning contractors receive needed payments later and may incur penalties for missed deadlines.
AGC is providing briefings directly to groups of federal procurement officials and Biden administration officials directly, and is working with coalitions to eliminate harmful tariffs on construction materials and to expedite freight movements. However, many of the current problems result from the extreme economic disruptions caused by the pandemic and subsequent labor shortages, aggravated in some cases by plant breakdowns from storms or other factors. These supply/demand imbalances will take time to work out.
Until the economy responds to the shocks that have occurred over the past year, what can be done?
The situation calls for immediate action by federal trade officials to end tariffs and quotas that are adding to price increases and supply shortages. Officials at all levels of government need to identify and remove or lessen any unnecessary or excessive impediments to the importation, domestic production, transport, and delivery of construction materials and products. Project owners need to recognize how much conditions have changed for projects begun or awarded in the early days of the pandemic (or earlier) and consider providing greater flexibility and cost-sharing. Contractors should become even more vigilant about changes in materials costs and expected delivery dates and should communicate the information promptly to current and prospective clients.
Owners and bidders may want to consider price-adjustment clauses that would protect both parties from unanticipated swings in materials prices. Such contract terms can enable the contractor to build in a smaller contingency to its bid, while providing the owner an opportunity to share in any savings from downward price movements (which are likely at some point, particularly for long-duration projects). Public owners and agency personnel should review all regulations, policies and enforcement actions that may be unnecessarily driving up costs and slowing importation, domestic production, transport, and delivery of raw materials, components and finished goods.
While contractors cannot unclog ports or rescind tariffs, they can provide project owners with timely and credible third-party information about changes in relevant material costs and supply-chain snarls that may impact the cost and completion time for a project that is under way or for which a bid has already been submitted. This communication must occur regularly, both before bid submission and throughout the construction process.
Owners can authorize appropriate adjustments to design, completion date and payments to accommodate or work around these impediments. Nobody welcomes a higher bill, but the alternative of having a contractor stuck with impossible costs or timing is likely to be worse for many owners. For projects that have not been awarded or started, owners should start with realistic expectations about current costs and the likelihood of increases. They should provide potential bidders with accurate and complete design information to enable bidders to prepare bids that minimize the likelihood of unpleasant surprises for either party.
The parties may also want to discuss the best timing for ordering materials and components. Buying items earlier than usual can provide protection against cost increases, but it comes with the need to pay sooner and to potentially pay for storage, security against theft and damage, and the possibility of design changes.
Materials prices eventually will reverse course. Owners and contractors alike will benefit when that happens. Until then, cooperation and communication can help reduce the damage.
Mike Salsgiver is the executive director of Associated General Contractors’ Oregon-Columbia chapter. Contact him at 503-685-8305 or email@example.com.