Burgos, June 21, 2021.- The Associated Contractors of America, (AGC) in its conjunctural report for the month of May, has shown a scenario of price increases in the construction sector. The conclusions of this association are very interesting to face in the coming months. Below, I highlight some keys:
For instance, a widely watched index of steel prices rose 11% in April alone, setting new record highs each week. The price of lumber has likewise reached new records throughout April.
Second, many projects or subcontractors’ packages are heavily weighted toward materials that have risen much more in price than the overall PPI for inputs. As Figure 2 shows, the PPI for diesel fuel (at the fuel terminal, not retail) increased 80% between March 2020 and March 2021. The PPI for lumber and plywood jumped 63%. The index for copper and brass mill shapes climbed 44% and the PPI for steel mill products rose 40%.
Some materials that have not risen as dramatically in price are nevertheless much harder to obtain than previously or have much longer lead times. For instance, the PPI for plastic construction products rose “only” 10% from March 2020 to March 2021. But the extreme freeze that hit Texas in mid-February damaged or completely shut down all of the plants that supply the raw materials for all construction plastics. In addition, the freeze burst thousands of polyvinyl chloride (PVC) water pipes, thereby adding to demand.
Because the depth and duration of the freeze was unanticipated and covered the entire production region (including facilities in Louisiana and Alabama), the damage was much more extensive and long-lasting than that caused by last year’s Hurricanes Laura and Delta. Both of those storms caused relatively brief shutdowns in more limited areas, with quicker recovery, in part because the operators had warning and experience with similar events. Consequently, as inventories of plastic resins are depleted, more shortages and price increases are expected.
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 underway or for which a bid has already been submitted.
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.
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). The ConsensusDocs suite of contract documents (www.ConsensusDocs.org) is one source of industry-standard model language for such terms. The ConsensusDocs 200.1 Materials Price Escalation Addendum offers the only standard contract document that addresses price escalation.
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 for the items and potentially paying for storage, security against theft and damage, and the possibility of design changes that make early purchase unwise.
The construction industry is in the midst of a period of exceptionally steep and fast-rising costs for a variety of materials, compounded by major supply-chain disruptions and stagnant or falling demand for projects—a combination that threatens the financial health of many contractors. No single or simple solution will resolve the situation, but there are steps that government officials, owners, and contractors can take to lessen the pain.
Federal trade policy officials can act immediately to end tariffs and quotas on imported products and materials. With many U.S. mills and factories already at capacity, bringing in more imports at competitive prices will cool the overheated price spiral and enable many users of products that are in short supply to avoid layoffs and shutdowns.
Officials at all levels of government 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.
Owners need to recognize that significant adjustments are probably appropriate regarding the price or delivery date of projects that were awarded or commenced early in the pandemic or before, when conditions at suppliers were far different. For new and planned projects, owners should expect quite different pricing and may want to consider building in more flexibility regarding design, timing, or cost-sharing.
Contractors need, more than ever, to closely monitor costs and delivery schedules for materials and to communicate information with owners, both before submitting bids and throughout the construction process.
Materials prices do eventually reverse course. Owners and contractors alike will benefit when that happens. Until then, cooperation and communication can help reduce the damage.