COVID-19 continues to present all of us with a myriad of challenges; however, material cost increases, inflation and availability of funding (especially in the K-12 market sector) support moving forward with well-planned projects.
Rising Construction Costs
Material costs rose in 2020 and continue to rise. According to an April 15th Barron’s article, “US Building Boom is Sending Lumber and Steel Prices Thru the Roof,” surging demand in the face of cumulative COVID-related production curtailments coupled with a backlog of projects now coming online have impacted numerous construction-related commodities … and increases are expected to continue.
Lumber has probably received the most attention because the price of many lumber-related products more than doubled in 2020 and continue to rise to this day. This increase alone has cost the average price of a new home to rise between $14,000 and $26,000. The National Association of Home Builders pegs the increase at a whopping $24,000. A few weeks ago, congressmen from both major parties wrote to President Biden asking his administration to intervene.
Many other construction-related commodities have risen in price, including copper, iron ore and most metal fabrications, PVC, crushed stone, concrete, roofing products, drywall, and glass. The list goes on, and rising fuel costs only exacerbate the point. On top of this, the Federal Government has already injected trillions into the economy with more planned; Biden’s proposed $2.3 trillion infrastructure plan calls for repairs to roads and bridges and investments and improvements to airports and transit systems over an eight-year period. If anything close to what is planned actually happens, material costs (and labor availability) will be impacted further.
Supply Chain Disruptions
In short, pandemic-related disruptions slashed production and reduced inventories for many if not most construction-related commodities … and the reverberations continue.
Those engaged in construction could spend a solid day just commiserating over material procurement issues, from electrical panel breakers to hardware, insulation, specialty MEP products, casework – and even foam! According to a nationwide survey from the Associated General Contractors of America conducted between February 19th and March 4th of this year, of 1,489 respondents, 52% were experiencing a “shortage of construction materials, equipment or parts.”
At this point, material delays are practically a “foreseen” issue that must be met with proper planning, early procurement and flexibility and resourcefulness when something truly “unforeseen” arises.
Have you heard the “rumor” that Amazon is locking up production of steel bar joists? [Bar joists are those lighter weight steel members that sit on top of and span from one wall to another to support floors (versus traditional steel “I” beams, called this because the cross section is in the shape of the letter “I!”).] This rumor has been corroborated by numerous phone calls with industry leaders who are in direct communication with suppliers: bar joists ordered today will likely not be available until early 2022.
Is this Fake News? All of us are familiar with the e-commerce behemoth and how pervasive Amazon has become in our lives. Amazon is now one of the world’s largest corporations with a market capitalization of $1.71 trillion and 1.3 million employees. Intuitively, we should not be surprised to hear that Amazon has become the largest consumer of commercial real estate. According to the international investment management firm Colliers, in 2020 Amazon signed over 170 transactions to occupy 87.9 million square feet of industrial space, making it by almost a multiple of ten the largest consumer of commercial space in the United States. At this moment, Amazon maintains 270 million square feet of existing warehouse space with an additional 94 million square feet in the planning stages. That is a lot of planned construction requiring a great deal of materials. While Snopes has yet to weigh in on the matter, it is not hard to connect the dots and project the enormous demand and planning likely going on behind the scenes.
As a firm, Fidevia has already coordinated with a design team and contractor to amicably and for deminimis cost substitute bar joists with conventional I beams in order to maintain the project schedule. We have other projects planning similar possibilities to hedge against current forecasts.
Interest rates are still at historic lows, but they will not stay there forever. An April 6th Forbes Magazine article noted the recent dramatic rise in bond yields and opined that inflation and economic growth (fueled in part by massive federal stimulus, past and anticipated) should continue upward pressure on longer term interest rates. Further assessment is beyond the reach of this snapshot.
The Elementary and Secondary School Emergency Relief Fund has presented schools with resources, some of which present timely opportunity for schools to address maintenance and construction needs.
Same Conclusion: A Well-Planned Project Makes All the Difference and Saves Significant Dollars
While no one can predict the future, past years (and this past year in particular) have taught us to expect what was previously unexpected. For Fidevia, some of our work was initially shut down last year, but most construction resumed fairly quickly and we spent the balance of the year adjusting to one challenge after another: manpower limitations and unavailability, workplace restrictions, government agency shutdowns and slow-downs and an unending carousel of one supply chain issue after another.
More than ever, with proper planning, there is tremendous opportunity to reap a significant “bang for the buck.” Conversely, without proper planning, Owners will likely find frustration and consternation and waste many thousands of dollars.
What should an Owner do?
Project delivery methods need to be carefully considered. The implementation of design-bid-build, design-build, state contracts and performance contracts each bring different opportunities and challenges that must be explored and weighed so the most appropriate delivery method is chosen. It can be the difference between an under budget project publicly and competitively bid and an over budget project at a great, inflated value. Said another way, the savings or increase in the cost of the project will be directly proportional to an Owner’s efforts to plan, package and bid effectively.
Construction-related contracts need to be amended to address COVID and its implications.
The construction relationship is a partnership. Contractors can be more selective so they will gravitate toward well-planned projects where they can “get-in-and-out” cleanly.
Procurement activities must be given higher priority.
Taking all of the above into consideration, pursuing construction makes great sense but requires intelligent, forward-thinking analysis up front to avert the risks inherent in the current landscape.
Forbes .. https://www.forbes.com/sites/davidkudla/2021/04/06/why-you-should-care-about-rising-interest-rates/?sh=3b37db1e13fe
Colliers .. https://www.colliers.com/en/news/cincinnati/the-amazon-effect-on-everything
ENR .. https://www.enr.com/articles/51477-whats-behind-the-materials-price-spikes