As we enter the halfway mark of 2021, the construction industry continues to experience extreme volatility in both the cost and availability of almost every major commodity. Although the vaccine is helping society return to a semblance of normalcy, for contractors, these times are no longer unprecedented—they’re here to stay until we reach a healthier equilibrium between a sluggish supply and surging demand within the bottlenecked global supply chain.
At Balfour Beatty, we have developed strong support structures that are effectively mitigating against project impacts and creating greater certainty for our clients and partners.
Creating Seismic Disruptions within the Supply Chain
While construction is no stranger to fluctuating labor and materials costs, pre-COVID market conditions coupled with the pandemic’s rippling impacts created a perfect storm that has upended the industry as we once knew it. The multi-faceted complexities of current market dynamics cannot be traced to a single source or cause and are predicted to continue into the foreseeable future.
In addition to evolving trade policies on major imported materials such as steel and aluminum, COVID-19 intensified pressures on an already labor-strained domestic transportation industry in dire need of dockworkers, stockers and long-haul truckers to move essential freight. Clogged with idle, anchored ships, U.S. ports have been the domestic origin of delays resulting in bare-shelved warehouses across the country.
From wildfires that raged along the lumber-rich West Coast to the deep freeze that paralyzed Texas resulting in mass chemical and raw material plant shutdowns, natural disasters have further stymied production and transportation. With widescale damage to domestic lumber sources, more Canadian goods have been imported, tacking on a 24% tariff to already soaring prices.
Once mills and factories resumed production after temporary stoppages in the early stages of the pandemic, they have done so at significantly reduced capacities in key source countries such as China, Canada and Mexico. Even the vaccine’s mass roll-out has not catapulted production into normal territory. Pressed to the brink, one major U.S. flooring manufacturer is currently oversold at 140% with 78% production capacity—despite adding a third shift.
Estimating in the Post-COVID Era
Today’s estimator must not only track fluctuations in commodities, but also work with industry partners to forecast market-specific prices and lead times as both factors could severely impact the ability to deliver a project on time and on budget. It is a careful and sometimes day-to-day balancing act between managing risk and ensuring project viability.
The cost of many major commodities is rising faster than inflation—and, in some cases, faster than industry experts can accurately and confidently estimate. According to Business Insider, lumber prices have risen by more than 250% in the last year, and after bottoming out last spring due in part to uncertainty surrounding the future of high-rise commercial buildings, steel prices have ballooned to nearly $1,500 a ton—nearly triple the 20-year average.
A recent Associated General Contractors of America (AGC) report captures the magnitude of buyout timing: “…if a contractor or subcontractor submitted a fixed-price bid in April 2020 based on materials costs at that time but did not buy the materials until February 2021, its cost for the materials would have risen an average of nearly 13%.”
Proximity of materials has increasingly become a game-changer for product selection, with manufacturers and retailers passing higher freight costs to customers. According to the Drewry World Container Index, the cost of moving goods by ship rose 12% in 2020 to its highest level in five-and-a-half years. Some suppliers have turned to air transit, a more expensive but extremely viable and faster option. Even once imported goods arrive in the U.S., however, transportation problems are lingering for trucking companies struggling to staff their fleets—a problem that has only been compounded by the recent surge in crude oil prices.
But price isn’t the only factor driving project uncertainty. The global microchip shortage is just one example of material delays that are resulting in record-long lead times for critical supplies like appliances.
For a project in Wilson, North Carolina, our team is re-designing the roof to accommodate a fix-six-month lead time for insulation—representing an approximate 225%-333% increase in lead times from pre-COVID norms. On that same project, our team bid out a steel package in mid-December 2020, and three weeks later, the lowest bidder was forced to raise its price by more than 10.5 percent.
On a campus housing project in the Northeast, the team experienced continued delays on 283 HVAC units, and just several weeks prior to turnover, received notice that bath fixtures had been backordered. To keep the project on track, our national procurement team leveraged the strength of our relationships with manufacturing and supplier partners to secure stock that otherwise would have resulted in significant delays.
Achieving Stability Amidst Market Volatility
In the wake of these seismic disruptions to the supply chain, maintaining relationships with strategic supply chain partners is arguably more important than ever before. Through its national procurement team, Balfour Beatty has established strong partnerships with multiple major suppliers that drive operational efficiencies, improve pricing and services and mitigate risks for our projects and partners.
In the early days of the pandemic, our national procurement team worked with partners such as White Cap and Anixter to secure critical, in-demand Personal Protective Equipment (PPE) and sanitation supplies that enabled our workforce to safely deliver essential buildings and infrastructure. Our team was also able to support the Balfour Beatty Investments business unit in procuring COVID-19 PPE for 76 locations nationwide, almost 50% of which include active military bases and forts.
To ensure our teammates have access to up-to-date commodity prices and availability to deliver for our clients, Balfour Beatty maintains a Materials & Commodities Price Index resource tracking key materials and commodities. To create the Index, Balfour Beatty leverages aggregate data from respected industry sources such as Engineering News-Record, but our national procurement partners also provide tremendous first-line insights into the state of the supply chain and optimal buyout timing.
At the local level, our preconstruction leaders are highly connected to the state of the market, as the number of proximate project starts greatly impacts the pricing and availability of both materials and labor.
Leveraging Strengths to Control Market Variables
As owners contend with lingering supply chain disruptions, they are increasingly seeking to partner with contractors like Balfour Beatty that achieve more predictable project outcomes. Similarly, contractors are becoming more selective in the jobs they bid.
With the purchasing strength of a multi-billion-dollar organization, strong national relationships with leading manufacturers and suppliers, stability of a strong balance sheet and history of consistent operations for decades with many hundreds of projects delivered successfully, Balfour Beatty is today’s contractor of choice for buildings and infrastructure partners across the U.S.
Balfour Beatty teams create greater certainty for owners before the first shovel hits dirt. As they work with project partners to deliver the most value, Balfour Beatty’s preconstruction teams leverage best-in-class DESTINI Estimator technology to provide real-time estimates—a significant differentiator amongst today’s market volatility. This enables earlier, more informed and margin-enhancing decision-making, which helps owners maximize their return on investment and future-proof their projects to the greatest extent possible.
To support safe, efficient and predictable project results during construction, Balfour Beatty teams maintain local equipment facilities containing a range of jobsite essentials from surveying materials and scanners to forklifts, small tools, temporary power, temporary heat and more. By supplementing outside rentals with internal equipment at competitive prices, Balfour Beatty ensures our teams are better positioned to help control demand and schedules.
Strategic contract structuring also offers the opportunity to render stakeholders less vulnerable to external market variables. The following tactics have proven effective:
Negotiating allowances for vendors and materials especially vulnerable to price escalation
Establishing a Guaranteed Maximum Price (GMP) later in design development
Obtaining early work/preconstruction packages with fabrication deposits
Assisting owners with direct purchase options
Sharing risk by setting contractor and owner thresholds for pricing relief
Even for essential industries like construction, COVID-19 has had profound and persistent economic consequences that are requiring tremendous innovation, resiliency and flexibility as the industry collectively level sets its future. Although the pandemic may have been without precedent in modern history, contractors can help strengthen the industry by setting a new benchmark for collaboration and connectivity within the entire supply chain.