Price Hikes, Supply Shortages Challenge Construction Industry
Framing the Issue
Few industries have been immune to the supply shortages and rising costs that have plagued the world economy over the past few months, but construction is especially vulnerable, relying heavily on materials — most notably lumber and steel, but dozens more as well — riddled by soaring prices. The good news is that demand for work is high, but many still worry about the long-term implications of a cost problem with no end in sight.
By Mark Morris
Early in 2020, several lumber mills and steel plants expected demand for their products to take a nosedive once the pandemic hit, so they slowed down or closed some of their operating plants. Instead, after only a brief hiatus in March, home and commercial construction resumed — and then significantly increased.
For Bob Boilard, vice president of Boilard Lumber, the decreased supply of lumber and growing demand have created multiple challenges. Orders for lumber that once took a week for delivery now have vague timetables and constantly changing prices.
“Pricing right now is set at the time of shipment, so we don’t know exactly what it’s going to cost us until it’s on the back of a truck,” Boilard said.
Because lumber prices change so often, Boilard and dealers like him study the commodity market every day to make sure they stay current. At press time, an eight-foot 2-by-4, used primarily to frame houses and certain commercial buildings, had increased to $11, up from $4 several months ago, a price hike of 175%.
Construction professionals have called this an unprecedented time. Price hikes and shortages of certain building materials are nothing new to the construction industry, but no one has seen inflation and scarcity of so many supplies that go into building a house or a business.
BusinessWest spoke with several construction managers who said we are currently in a perfect storm of greatly increased demand, COVID-related manufacturing slowdowns, and, literally, storms.
For instance, back in February, ice storms knocked out the power grid in Texas, shutting down several resin plants there and in neighboring Louisiana for several weeks. The resins from these plants are used in a broad range of building products, from adhesives to make plywood to the plastic that insulates electric cables. The resins are also used in many paints and primers.
“This is the first time I’ve seen drastic increases and shortages affect this many products. In the past, we’ve seen oil prices drive up the cost of roofing shingles, but never across the board with nearly every building material.”
Dan Bradbury, director of Sales and Marketing for Associated Builders, said the commodity price he follows closely is cold rolled steel. Most of the structures his company builds are pre-engineered metal buildings for commercial and industrial use.
“Cold rolled steel prices have increased 225% since last August,” Bradbury said. Due to shortages in getting the steel, he tells customers the building they order today will be delivered in about 20 weeks. Before COVID-19, that same project would take 10 to 12 weeks.
Increases and shortages don’t end with commodities, but also affect other materials involved in construction. Craig Sweitzer, co-owner of Sweitzer Construction, said an electrical contractor told him about the price instability of a heavy-duty cable used in commercial applications.
“His supplier would only hold the price for one day,” Sweitzer said. “Usually, our material prices are good for 15 days, so we’re not used to seeing this.”
What makes this time different is the broad array of materials impacted, said Nick Riley, owner of N. Riley Construction.
“This is the first time I’ve seen drastic increases and shortages affect this many products,” he noted. “In the past, we’ve seen oil prices drive up the cost of roofing shingles, but never across the board with nearly every building material.”
As someone who builds medical and dental offices, Sweitzer uses steel studs in place of 2-by-4 wood studs for interior wall partitions. At one time, the two products were close in price. While prices for both have increased, a steel stud is now far less expensive than wood.
“While the price of a steel stud has increased about 30%, it’s well below the double and triple price hikes we’ve seen with wood,” he said, adding that he’s also experienced shortages in random materials such as joint compound to finish walls, acoustical insulation, and interior doors. “There’s a particular style of door we use that once took a week to get. Now it can take eight weeks, and the price has increased.”
Despite shortages and price hikes, the construction managers we spoke with are all grateful to have plenty of work scheduled.
“I’m fortunate to be busy, and at the same time, it’s incredibly stressful to keep everyone happy and meet deadlines,” Riley said. “It’s a crazy time right now.”
To manage some of that craziness, he has invested in a new tool, a CRM (customer relationship management) system.
“Through our system, we can keep everyone on the same page, and it allows customers to check in on their project,” Riley said. “By staying in closer contact with our customers, they’ll know immediately about any issues that might slow down a project.”
Managing expectations becomes essential when prices and timelines are uncertain. When someone wants a fast turnaround on a project, Bradbury gives them straight talk. “We’re honest and upfront with our customers as to what’s realistic,” he said.
Some customers have chosen to delay their projects, anticipating that prices may come down. Bradbury said that may work for some, but when a company needs a building to grow their business, they can’t always wait it out.
“My advice is to build it sooner rather than later because we are more likely to see further price increases,” he said. “Also, with lead times so long, the sooner you get in the queue for your project, the better off you’ll be.”
Beyond materials, shortages have also extended to the human element. Riley said finding laborers for home building has always been challenging, and the increased demand for new homes only exacerbates an already-tough situation.
One of the thorniest challenges to solving supply shortages, Boilard noted, involves finding truckers to move the goods. “You can’t get drivers to get behind the wheel of a tractor-trailer. There are lots of trucking jobs open right now, but few people to fill them.”
Construction workers were deemed essential during the pandemic, so their time off the job was brief. Bradbury said the short shutdown allowed his company to retain most of its workers. “Some of our subcontractors have felt labor shortages, but we are grateful that has not had a significant impact on our business.”
When COVID first hit, Sweitzer gave all his employees a raise to make sure they were compensated well enough to stay with his company. “We’ve been lucky because we have an extremely good and loyal crew. I’ve found that good labor is worth the investment.”
Predictions on when prices and supplies might stabilize is anyone’s guess. Boilard explained that his company determines its lumber-buying needs early in the year, which these days is a real challenge. If a dealer stocks up heavily now only to see prices eventually crash, they are stuck with expensive inventory in a market that no longer supports those higher prices.
“It’s not a fun time because we have to do a balancing act of meeting our customers’ needs without having too much inventory on hand,” he said.
Riley has seen conflicting predictions about lumber prices dropping either at the end of 2021 or sometime in 2022. He’s seen lumber and electrical wire come down before, but he’s more concerned about other materials that go into building a house.
“In my years in business, when windows, siding, and roofing shingles increase in price, I’ve never seen them come back down,” he said. “I think increases like that are here to stay.”
Bradbury said he can’t predict what will happen in his industry, but he hopes to see the supply of steel catch up to demand by the end of this year. “My best guess is supply will get better and lead times will improve before we see prices start to stabilize.”
Sweitzer noted that he has a degree in management, while his two sons have degrees in economics and business administration, so they often discuss what may lie ahead. And their conversations have been optimistic.
“Markets always find some level of equilibrium, and I believe that will happen in this market,” he said. “Market equilibrium may take a temporary vacation, but it has always returned, and I think it will again.”