More Inflation and Delays Expected to Drive Up Construction Prices

Inflation continues to takes its toll on the construction industry—fueled by spikes in commodity prices, supply chain disruptions and material delays. Sanctions on Russia, due to its invasion of Ukraine, have led to a further rise in pricing and supply disruptions. And the sum of these issues is expected to affect all parties along the contractual chain.

Communication throughout the chain can help soften the effects these issues will have on construction projects. "Communicate with your clients about pricing and the imminent inflation bubble we are facing," said Ty Knox, ICCE, director of credit & risk for EFCO Corporation (Des Moines, IA). "Everyone is in the same boat, but you must be transparent to not be perceived as taking advantage of the situation."

Knox and his team have begun evaluating their price list in anticipation of more inflation and an increase in raw material costs, he said. They also are discussing the potential use of surcharges if the war increases prices further due to supply chain or import delays.

For companies that ship standalone shipments—not part of a contract that spans weeks or months—price fluctuations won't be too problematic, said Chris Ring, of NACM Secured Transaction Services (STS). However, lengthier contracts will likely face a stronger impact from inflation. "The cost of a 10-foot, two-by-four could increase exponentially in just a matter of days," Ring said.

Material suppliers that can afford to stockpile will fare better, said Connie Baker, CBA, director of operations for NACM STS. Delivery delays and price increases related to those delays make this unrealistic, she continued.

Instead, Baker recommends including language in contracts to address these issues. "Suppliers need to protect their rights to pass the higher cost onto their customers," she said. "The subcontractor also will need to make sure he can pass the cost up the chain too." Today's environment requires scrutinizing purchase orders and change orders for flexibility in pricing and delivery, Ring said.

Another issue facing the construction industry is the cost of gas. Construction firms use so much fuel-intensive equipment and material, and these items are costly to ship, said Ken Simonson, chief economist for Associated General Contractors of America. In response, suppliers should consider ways to add a fuel surcharge to their invoices that can be passed onto the subcontractor, which could then pass the fee along in its contract with the general contractor, Baker advised.

Although these issues have been exacerbated by the war, Simonson adds that the trouble really started in the fall of 2020 when the costs of materials went up in general. "The producer price index for all inputs, materials and services—including financial services bought by contractors—rose 25%, year over year, from June 2020 to June 2021. The most recent index, released in January, was up 20%.

"We did a survey back in December where 84% of our members said that costs have risen more than they had anticipated," Simonson said. "Presumably, they had built [rising costs] into their bids for this year. Sixty-nine percent of [contractors] said they are putting in higher prices."

Two strategies to potentially address rising construction costs include owners and contractors engaging in a price sharing agreement to prevent building large contingencies into contracts for future price increases, or owners agreeing to buy materials sooner to hopefully lock in a price and get supply on hand quickly, Simonson explained.

The survey mentioned above also finds that 72% of respondents said projects have taken longer than anticipated, he said. "So, for this year, 44% of the respondents said they're quoting longer completion times."

As ships continue to struggle getting out of the Black Sea and materials take longer to produce, Simonson predicts, "Another year of a lot of unpleasant surprises." However, good communication and quick response between suppliers, fabricators, subcontractors, general contractors and owners is crucial.

"We're looking to owners to be responsive and more flexible about pricing, providing quick answers when conditions change, and being willing to allow the substitution of materials from suppliers to avoid some of these supply chain bottlenecks and extreme price increases," Simonson said.

Simonson, along with Amy Crews Cutts, Ph.D., CBE, NACM Economist, will provide further insight on the industry during NACM's complimentary members-only webinar, U.S. Construction Outlook: Workforce Worries, Project Prospects, Supply Snags at 3pm EST on March 14.

-Bryan Mason, editorial associate

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Sunday, 26 June 2022

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