The Tampa Bay Business Journal article was written by Eric Collin, Owner and President at Firmo Construction and published in April 2021.
It’s been evident since the start of 2021 that construction, both commercial and residential, is exponentially expanding in our region – to our industry’s, and our economy’s, gain. However, this growth in construction has also created an adverse effect on one of the most important aspects that keeps the industry functioning smoothly: the construction supply chain.
As construction projects continue to rise, general contractors’ needs for construction materials and supplies have also increased, which has created a surge of demand that’s been weighing on the supply chain. Here’s a deeper look into this recent trend in our industry, considerations for adaptations to construction processes, and solutions general contractors can implement to diminish the negative effects.
The cost of materials
According to Associated General Contractors (AGC), government data released earlier this month, another round of costly pricing increases and supply chain disruptions have perpetuated further hardships on contractors in our region, not only driving up construction costs, but also slowing down progress on their projects. In some cases, prices per unit almost doubled. Additionally, the data found that more than three-fourths of construction firms have indicated projects are being postponed or canceled due to unavailable materials or cost overruns, while only one out of five reported winning new work in the previous two months.
Circumstances like these are catalysts for unfavorable outcomes in our industry, starting with higher project estimates and bids. As a result of these steep material pricing increases, many local general contractors, including ourselves, are proposing project bids with higher estimates. The general conclusion drawn is that contractors are trying to balance out losses due to the pandemic, leading to a hike in cost. In actuality, however, it’s quite the opposite. Contractors are trying to balance the surge in need for construction services while accounting for the matter of not only rising material costs and material delays, but also labor shortages in the industry.
Some ways contractors can address these obstacles include introducing innovative methodologies and expanding their thinking beyond the construction site. One technique like this is prefabrication. This strategy, which utilizes components made off-site in a factory and puts them together on-site, can be applied to full structures (modular construction, for example) as well as to materials, like cross-laminated timber (CLT). Not only is this a versatile and strong construction material, its prefabricated nature makes it highly cost effective since CLT arrives ready for assembly on the jobsite, allowing our teams to deliver high-quality, cost-conscious projects.
Supply chain disruptions
Looking at the matter of material costs from a broader perspective, the construction industry’s heavy reliance on the global supply chain makes it particularly sensitive to external effects, the most recent and prominent example being the pandemic. Issues stemming from supply chain disruptions often result in increased costs, completion delays, and even impacted lender loan portfolios — particularly construction loans relying on a robust labor force and time-efficient material deliveries.
In addition, many local construction companies heavily rely on basic materials, like specialty products, tiles, flooring, and more, that are sourced from heavily delayed, or now-unavailable, global manufacturers. This has shifted the search to regionally-based materials, creating an even higher demand on a minimal supply. For example, many supply manufacturers we’ve encountered have been able to supply only a fraction of the materials to our projects, due to hundreds of other cash reserves, or up-front contractor demands.
All of these supply chain impacts are not only creating additional obstacles with regards to time efficiency in production, they result in elevated costs. This is stirring an industry-wide realization that in order to navigate supply chain disruptions, building resilience into supply chains is vital.
Building a resilient supply chain
So, how do we diminish the overall effects on local contractors that are caught between a pandemic-affected market that isn’t willing to pay more for construction, and construction material prices that continue to increase?
At a time when cost is critical, reimagining supply chains could be a way to build resilience and minimize costly disruptions before they occur. One way is to prepare for disruptions. Now is the perfect time for companies to build resilience into their operations to be better prepared for any type of future disruption. There’s an ideal opportunity to build that resilience on multiple fronts if industry leaders are restructuring their value chain from end to end. These opportunities range from reevaluating business models and building efficient industrial supply chains, to building manufacturing and distribution facilities to help alleviate vulnerabilities the pandemic brought to light in the just-in-time supply chain.