Contractors tackle volatile supply chain

From the extensive and changing array of tariffs to declining economic indicators, improved interest rates, high lead times for select products, and a sustained, ample backlog of construction work, contractors are navigating challenging conditions as they source materials and equipment.

So how do companies manage their risk, expenses, project performance and stress levels in the midst of a turbulent supply chain?

Mitigating risk

The first signs of a tariff war prompted Cole Roofing to identify and prepare for possible challenges.

“We had constant communication with vendors to understand the impacts they were anticipating,” said Bill Cole, President. For example, “we knew one underlayment product we use comes from Canada. So, we were asking the vendor: What are you doing? Are you moving more inventory across the border early? What kind of price increase could the tariff create? What alternative products could we source within the United States?”

The second step in Cole’s communication plan was for its legal team to determine the best language to put into contracts to address the risk tariffs posed to project costs.

The third step was to start talking about tariffs to customers.

Price fluctuation became “a heightened topic so the discussion with the customer was do you want to take on that risk or do you want us to take on that risk,” Cole said. “If the customer wants to assume the risk, then let’s set an allowance aside and create criteria for using that allowance so everyone understands the potential impacts. If the customer doesn’t want to take on the risk, then I have to be responsible and say I have to charge you more because I don’t know how much this product will cost by the time you’re ready to install it.”

Those conversations with customers “were proactive and fruitful,” Cole said. “People at least appreciated the acknowledgement of the challenge we are all facing.”

Cole, who has not yet seen major price hikes, says those preparations have helped his team and his customers “keep a level head” in a turbulent market.

Volatile metals prices

“There has certainly been volatility in steel prices,” said Jerry Taylor, Vice President of Sales and Estimating for Baltimore Fabrication.

While some steel products have seen marginal increases of 3 percent, other prices have shot up 50 percent, Taylor said. “It’s not uncommon to have $150-a-ton increases weekly on certain profiles of steel.”

That has put pressure on the budgets of many projects, “especially jobs bid in late 2023 through 2024 that had a procurement period through the first quarter of this year,” he said. “No crystal ball could have projected these types of increases.”

Some jobs need to be renegotiated prior to release to address the rapid cost increases.

Fortunately, “most owners seem to be understanding,” Taylor said. “They just need you to provide proof of the cost changes and the mills are doing a great job at putting out their announcement letters weekly, letting us know what changes are forthcoming.”

Completing procurements, however, still requires heightened market tracking and communication with general contractors.

“It takes 60, 90, 120 days from final GMP to procurement and purchasing by subs. That’s really challenging for us to manage when vendors will only hold prices for 15 or 30 days,” he said.

To contain its risk, Baltimore Fabrication has adopted a more cautious bidding practice.

“The construction industry is full of risk,” Taylor said. Cost changes are “another component of the risk and being cautious about your exposure is extremely important in this environment. So, if a job doesn’t feel right, if it feels like too much exposure to risk on pricing, I tell my guys let’s not go after it.

Let’s go after jobs that make sense and feel safer.”

Long lead times

At Rosendin Electric Co., “we have seen a lot of fluctuations in the market for copper, steel and aluminum,” said Tony Esteve, Business Development Manager for the MidAtlantic.

Imported steel and aluminum prices have risen due to 25 percent tariffs. Copper has not been subjected to a product-specific tariff. Yet even before tariffs on China and other countries were announced, the cost of copper climbed about 30 percent due to the anticipated impacts of a trade war.

“A lot of copper producers – in China and Chile, in particular – have been slowing production because they believe people will be buying less copper,” Esteve said.

Since metal purchases comprise 20 to 25 percent of an electrical contractor’s costs, Rosendin has long tracked the markets and made large purchases when prices have dropped. The company, for example, made a large copper purchase in early December when the price was $4.02 a pound, Esteve said. By the beginning of April, that price was $5.11 a pound.

Another significant and persistent supply chain challenge is the long lead times for large electrical distribution equipment, generators and liquid-filled transformers.

“The supply chain never really recovered post-Covid,” Esteve said. “A lot of big manufacturers expected a slowdown but market demands grew due to a lot of data center work and renewable projects.”

That challenge, however, has produced a benefit for the electrical industry, he said. Electrical equipment lead times which sometimes exceed the construction schedule for a building, have prompted owners to do early consultations with electrical contractors.

“That’s helped us because we’re seeing opportunities on projects earlier than we would in the traditional pipeline,” Esteve said.

That process has enabled Rosendin to build relationships with owners and arrange the timely acquisition of electrical equipment for projects.