Pricey, slow and volatile: Coping with the construction supply chain
It’s a lot of upheaval to factor into a construction project. Prices for construction materials have increased frequently and sharply over the past year.
Lumber hit a record high of $1,400 per 1000 board feet this spring – up 57 percent since the beginning of the year and up 325 percent since early 2020, according to Market Insider. Diesel rose 79.5 percent from March 2020 to March 2021 while iron and scrap steel rose 60 percent. The U.S. Bureau of Labor Statistics’ Producer Price Index reported that prices for granite, insulation, concrete block and brick climbed to new records in early 2021. Those aren’t the only increases and the increases aren’t over.
“Price changes that used to happen annually or quarterly are now happening month by month or, in some instances, week by week,” said Greg Permison, Manager of Business Development at Gilbane Building Company. “Electrical supplies are up since the beginning of 2021. Steel, mixed metals, copper, PVC have all increased. And we are hearing cast iron will likely go up as early as June.”
“It’s insane what’s happening with lumber prices,” said Annette Walter, President and CEO of Timber Industries. “We have received notices of two price resets just this week.”
“Materials, especially steel, are super expensive and super volatile,” said Drew Entice, Director of Business Development for ARCO Design/Build Industrial. “Prices have risen at historic rates. Joist and girder costs are about 100 percent more than they were in August of last year.”
Price hikes, of course, are only one aspect of the current upheaval in the construction supply chain. Greatly expanded lead time is the other.
“We used to get metal studs within five days. Depending on the manufacturer, it now takes up to five weeks,” said Craig Smith, Senior Project Manager, Wohlsen Construction. “For electrical main switches, the lead time used to be six to eight weeks. Now, we are looking at 12 to 20 weeks.”
Lead time for structural steel has become especially challenging. Suppliers now typically estimate lead time for steel joists and girders at 20 weeks, 30 weeks or even longer. Pre-pandemic, ARCO could obtain joists and girders for large distribution center projects within three to four months, Entice said. The lead time on those items now is extending to a full year.
So how can contractors manage all that supply chain upheaval and deliver successful projects? BC&E members discussed some of their current strategies.
Design Assist and Value Engineering
“The key is flexibility,” Permison said.
In the current market, owners, design teams and construction teams need to begin collaborating extra early in the process, continuously monitor supply chains for potential issues, and identify alternative materials and design options that will enable them to deliver on the owner’s needs, Permison said. That realization is already prompting more projects to include design-assist services and greatly expanded value engineering.
“Value engineering begins much sooner in the design process and it remains ongoing. It is happening perhaps two or three times a day versus the previous norm of once a month when a milestone estimate was provided,” he said.
This approach to project management also works best when subcontractors become involved especially early and play a greater role in selecting materials, Permison added.
Project teams also need to be prepared to make significant changes in how a building is constructed. Faced with long lead times to obtain steel joists for one project, Wohlsen “started looking at alternate methods, like cold formed metal joists,” said Curtis Dalsimer, Preconstruction and Estimating Manager. “Cold-formed joists cost about twice as much, but you can get them in eight weeks. If the project has to be completed quickly, that might be an option.”
“On a few projects, we have had to reconfigure construction sequence so that we can do as much as possible without steel,” Entice said. Before receiving joists and girders, ARCO has erected tilt-up concrete walls, installed extra bracing so the walls could stand for longer periods then erected the steel from inside the building once the shipment arrived.
Managing risks and expectations
To cope with prices and shortages, many companies are putting extra effort into expanding their network of suppliers and strengthening relationships with long-time suppliers.
Timber Industries, for example, has wrestled with the double challenge of soaring lumber prices and heightened demand for shipping pallets (one of Timber Industry’s main products). The company, Walter said, has weathered that challenge largely due to its extensive network of suppliers and business practices that treat suppliers especially well, such as paying for shipments within 10 days.
Project teams and owners need to be ready to work with new contracting restrictions.
“Subcontractors will not hold a price longer than 30 days once they submit a bid,” said Joseph Rode, President of the Mullan Contracting Company.
“We are seeing subcontractors provide pricing that is only good for a week,” Dalsimer said. “If you bid something but don’t award until three months later, there’s a good chance the contractor will request cost increases.”
Consequently, general contractors and owners need to be ready to make awards faster and make extra efforts to lock in prices.
“We try to get owners to agree to deposits because more and more suppliers are requiring deposits on materials so they can lock down their costs,” Smith said.
Finally, contractors increasingly need to have blunt conversations with owners about the current realities of the supply chain.
“You have to assume some risk to succeed in business and you have to find ways to manage when problems come up,” Rode said. “But supply timelines are putting construction schedules in jeopardy. If an owner wants a building on a tight deadline, it’s just not realistic to give certain guarantees.”