Two years into the pandemic, the construction industry is still grappling with the fallout of the economic shock as builders scramble to secure raw materials and the workers to keep their projects on track.
Contractors have told us that they are more concerned about supply chain bottlenecks than the rising cost of goods.
The whipsaw change over the past two years has fragmented the construction supply chain, leading to bottlenecks that were never envisioned before the pandemic.
Contractors say that their biggest challenge is getting materials to job sites for installation. Items like structural steel joints, windows and door frames that used to take a couple of days to deliver are now taking months to arrive.
RSM monitors bottlenecks like these in the broader economy through its proprietary RSM US Supply Chain Index, which tracks the state of the supply chain over the past 20 years. Although the delays have eased in recent months, they are still far worse than in normal times, the latest reading shows.
For construction firms, the delays are creating significant logistical problems for an industry that depends on keeping a tight schedule and minimizing volatility. If just one material is held up, or one subcontractor cannot meet a deadline, an entire project can be delayed.
The result can be a setback of days, weeks or even months, with a commensurate impact on profitability. That is why our clients and contractors have told us that they are more concerned about supply chain bottlenecks than the rising cost of goods.
Material costs are no small matter
To be sure, the rising cost of materials is no small matter. Since January 2020, before the pandemic, the cost of steel products has soared by 139%, softwood lumber prices have risen by 73%, copper and brass mill shapes prices have increased 50% and plastic construction products prices are up 41%.
But most contractors are spending the majority of their time editing and re-editing project timelines to ensure that the right people are on the right job, with the right materials, at the right time.
A survey conducted last year by Associated General Contractors, a trade association, noted that 88% of construction firms were experiencing delays, with 75% of those citing longer lead times and shortages of materials as the reasons for the delay.
The biggest roadblocks, contractors are telling us, are steel and lumber. Both products have soared in cost, with the increases made worse by tariffs imposed in recent years. The Trump administration, for example, imposed a 25% tariff on steel, and the Biden administration doubled the tariff on Canadian lumber to 17.99% from 8.99%.
Many construction trade groups, not surprisingly, have lobbied for reductions in these rates, but to no avail. At the same time, China, the largest exporter of steel, cut production last year, and plans to continue those reductions this year. Lumber production in the United States continues to be hurt by wildfires in the Pacific Northwest and by a mountain pine beetle infestation.
Managing the disruption
So what is a contractor to do? To cope with these issues, contractors can rely a three-pronged approach to keep a project on track:
- Find alternatives: Can other materials can be used, and are they available?
- Look at the contract: What are your contractual rights, including general conditions and price escalation clauses? And are you making sure that appropriate terminology is included in all new contracts?
- Communicate early and often: Are you in regular contact with suppliers and customers about the status of their projects? This is the most important step to take. Communicating with suppliers about delivery dates and needs for a project will help them understand what is needed and allow them to plan appropriately. The same goes for customers. It’s a simple step, but it goes a long way in ensuring project success.