The New Year Finds the Construction Industry Strong but Facing Material Challenges and Rising Costs

“For many years, people stopped warehousing and construction was all about on-time delivery, fabrication and eliminating the need to store materials,” recalls Andy Holub, vice president and director of pre-construction and special services for Clune Construction. “Nowadays, nobody can get anything on time. When I talk to suppliers, they are warehousing more. They are buying commodities, like steel studs, when the prices are good. The other thing is that our trade partners don’t commit like they used to. We might say we want it in 12 weeks and they will say they don’t know if they can do it. We get a lot of disclaimers saying they aren’t responsible for delays due to COVID.”

Root Cause

The U.S. Chamber of Commerce’s Commercial Construction Index is designed to gauge the outlook for, and resulting confidence in, the commercial construction industry. SOURCE: U.S. Chamber of Commerce’s Commercial Construction Index

So how did we get here? The consensus view seems to be that the construction industry, as well as the larger economy, are facing pressures that are a combination of the impact of COVID essentially stopping the global economy for a time, as well as other underlying issues that predate the pandemic. For example, the construction industry was already dealing with a lack of skilled labor before 2020, but the pandemic amplified that problem significantly.

“We’re currently living in the time of the Great Resignation, where millions of people have left their jobs. These positions supply a lot of materials for the construction industry, and their loss is causing a lot of these delays,” Natarelli explains. “My hope would be that as we get deeper into 2022 and collectively get a better handle on the pandemic, we will see a lot of these vacant positions get filled, which will help put the construction industry back on track.”

“The supply-chain issues are pandemic-related and workforce-related. Those will work themselves out over time,” Dubay adds. “Inflation is driven by the high demand for goods, and the restarting of the service-sector economy. There is a lot of money out there to be spent. We have high demand with a lack of goods because of supply-chain issues, so high demand and low supply push up prices.”

“My fear is escalation isn’t stopping. We’re seeing a lot of cost increases, and controlling that is difficult,” Holub notes. “People are busy, and when people are busy and asked for a budget, they just throw out numbers. Something that might cost $10, they’ll quote you $20. They’re hedging their bets and I have to ask myself if I need to put escalation on top of that or if they have it covered. It can be a lot of money. Fees are competitive right now because people want work and need work. But as things get busier, those will increase, as well.”

“We have the workforce issue, with 3.7 million more job openings than workers available, so wages are rising and businesses are passing those off to customers as much as they can. And on the monetary side, the Fed has increased its balance sheet by more than $5 trillion since February of 2020,” Dubay explains. “That is now trickling out into the economy and putting more upward pressure on prices. The workforce and supply chain will work themselves out. The monetary issue with the Fed is a big unknown.”

Positive Prospects

All of this translates to a lot of headaches and headwinds in the short term, but the good news is that it appears the conditions underlying commercial construction and the overall economy remain strong. There is optimism that 2022 will be a good year for the industry, even with all the twists and turns.

“I’m hopeful this is a hiccup. My understanding is that we have a backlog because companies had to shut down and couldn’t make product. The demand on steel stud is far greater than the U.S. can produce right now,” Holub says. “That’s probably a year away from correcting itself. But we’ve learned a lot about how to handle the situation. And demand is still there. There are still tower cranes and buildings going up.”

“One of the main positives we’re seeing is that the dollar value of projects in the planning stage is near a 14-year high,” Branch remarks. “That suggests that as 2022 unfolds, on-the-ground construction activity will pick up in meaningful ways across the country. From a sector perspective, the strongest markets in 2022 will be warehouse, manufacturing, health care, education, data centers and infrastructure.”

“I think in 2022, contractors will still be struggling with the supply chain and it will be a tough year from a pricing perspective,” Natarelli adds. “But on the positive side, with the infrastructure bill and the potential of other industries picking up production, backlog will be plentiful across the board. Contractors who are in the appropriate financial position, with working capital and equity, will capitalize on the new work generated by the infrastructure package.”

“We’re looking at a period of strong growth, and that’s even with the headwinds of inflation, workforce shortages and supply-chain issues,” Dubay says. “We’ll get past those issues, though it will be a little painful. It’s going to slow growth from where it would be, but we’ll still have high growth rates. The key issue for 2022 and 2023 is how aggressive the Fed will have to be fighting inflation, and what policy changes needed to combat inflation will impact the economy and growth. The economy could continue to grow at a strong rate and we’ll see the level of inflation come down. If we struggle to get inflation under control, we could see an impact on growth. I don’t think it would cause a recession, but it’s a thing that does bear watching.”

About the Author

Jim Schneider, LEED AP
Jim Schneider, LEED AP, has worked in the design and construction industry for almost 20 years. He writes about architecture, sustainability and construction from Denver.

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