Hurting in the material world: Supply chain, increasing costs creating havoc with construction industry

The same material costs that have plagued homebuilders in the Spokane area also are creating havoc with large-commercial construction companies across the country.

The Associated General Contractors of America released a survey last week showing 93% of more than 1,400 respondents are reporting higher costs for materials, parts and supplies.

While construction has remained one of the economic bright spots during the pandemic, the supply-chain problems threaten to derail that momentum as many companies are reporting that projects have been either delayed or canceled, said Ken Simonson, the AGC’s chief economist during an online discussion about the survey.

“One year after the pandemic struck, it is still having severe and … diverse effects on construction firms,” said Simonson, whose agency represents more than 27,000 commercial contractors who build almost everything except homes.

“The survey makes it clear that the construction industry faces a variety of challenges that threaten to leave many firms and workers behind, even as some parts of the economy are recovering or even thriving,” he said.

The problem for most construction firms has not been finding work, it’s been finding enough materials, supplies, parts and workers to complete the jobs, Simonson said.

“The pandemic has left the supply chain for a range of key construction components in tatters and undermined demand for a host of private sector projects, in particular,” he said.

Some 85% of those firms that responded to the national survey indicated they have faced higher costs during the past year.

“In fact, we are getting reports daily now of dramatic increases in not just one material or category, but many,” he said. “The folks who are in that end of the business are generally predicting things will remain as bad as they are if not worse … for several weeks at least. We are warning our members that they will have no relief for a while.”

Another 71% of those surveyed said they have suffered delays or disruptions based on material shortages, and about 75% reported having projects delayed or canceled during the pandemic.

“It’s clear the economy has a long way to go to sort out these kinks,” Simonson said.

In the Spokane area, contractors have not reported losing projects, said Cheryl Stewart, executive director of the Inland Northwest Associated General Contractors, which represents members in Washington east of Moses Lake.

“I was on the phone with a developer (Friday) and they are looking hard at the price of building right now,” Stewart said. “They are going to look at those costs and not be able to build what they want to build because of those prices.”

She said she expects the price spikes to transition into material shortages this summer. In addition to lumber, Stewart said she’s heard that contractors have been warned about upcoming shortages in PVC pipes.

“That’ll affect everything from building to landscaping,” she said. “We are just seeing these increases across the board. I don’t think we’ve seen the full impact yet.”

In the national survey, most contractors reported problems getting supplies from domestic and foreign manufacturers. But Simonson said much of that problem comes from shipping problems.

He noted the backlog of containerships off the West Coast that are waiting to be unloaded.

“In some ways, this is similar to what we saw in 2005 to 2008,” Simonson said. “At that time, initially all phases of construction were just booming. But we had several years where manufacturing capacity had not grown.

“And, so construction really outgrew the supply capacity for things like gypsum wall board,” he continued. “The steel industry was also not able to keep up.”

The difference this time is that the pandemic has adversely affected the entire supply chain.

“We have dozens of ships backed up off the West Coast ports,” he said. “We also have limitations on the number of truck drivers or sawmill employees who can come back to work because they have COVID or somebody in their family does.

“It’s not so much a total lack of capacity,” Simonson continued, “it’s more of getting things synced up again.”

While the survey makes it clear that contractors mostly face material cost and supply problems, it appears that larger contractors have fared better.

The largest firms, those with $500 million or more in revenue, were more likely to have additional projects in the past two months. The smaller companies, with less than $50 million in revenue, were half as likely to land more jobs or say that revenue matched that of the previous year.

Despite all the challenges, Simonson said, about 60% of the firms that responded to the survey expected to hire more employees in 2021 if the logistics problems can be fixed.

“No matter how bad things look for the whole economy, they tend to be upbeat about their own prospects,” Simonson said.