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What Does the Rising Cost of Construction Materials Mean for the Industry?

Posted by Kirk Biddle on May 14, 2021

The construction industry has been fortunate that it hasn’t been affected by the pandemic as much as in other industries. Construction employment and new construction starts certainly were impacted, but the industry has been fortunate to see the demand for new single family residences posting growth over prior years. In some markets, the multi-family housing starts have also returned to pre-pandemics levels. Additionally, we are also seeing an overall increase in construction planning and starts.

With residential construction thriving, a new problem has popped up. That is the skyrocketing cost of construction materials. How does this happen? It’s a perfect storm of the global supply chain snafus that funnel down to the contractors who purchase the construction materials.

How the Pandemic Caused the Cost of Construction Materials to Rise

Construction companies have to obtain the material somehow. The global supply chain contains many points from Point A to Point B. The pandemic forced factories to scale back as they did not have enough workers.

One reason for this was the shift to virtual schooling. Someone had to stay home to supervise the kids. The other reason was the virus itself. Some workers contracted COVID-19 while many others remained home to tend to sick family members. As a result, companies had to refine their manufacturing processes to protect the health of their employees.

Then, there was the famous Suez Canal blockage. A strong gust of wind and the lack of visibility caused the cargo ship MV Ever Given to become stuck in the Suez Canal for six days. This prevented more than 100 other shipping vessels from sailing through the canal. It held up $9.6 billion in global trade each day it remained stuck.

Remember the toilet paper crisis of 2020? That created a backlog and it took manufacturers many months to catch up. This is similar to what’s happening to construction materials with the shipping disruptions. It’s basic economics. When products are scarce, prices climb. Just how bad is the price increase?

Dodge Data and Analytics from January 2021 shows a year over year (YOY) increase of softwood lumber by 73 percent. Plywood’s YOY is almost 36 percent, hardwood lumber is 15 percent, and plastic products at 7 percent.

This creates a major problem for construction companies. Those who provided a pre-pandemic price quote are seeing an enormous surge in their project costs because of the price of construction materials. The price of lumber, for example, has soared 50 percent to reach a two-year high.

How the Construction Materials Backlog Happened

This interactive chart of material price changes from Construction Dive shows the explosion of prices as clear as day. According to the National Association of Home Builders, the following are the main causes of the increase:

  • Closing of mills due to state and local government lockdown measures.
  • Mills and factories reduced capacity due to predictions of a plunge in demand.
  • Unanticipated surge in demand from do-it-yourself projects and big-box retailers.
  • Housing market during the pandemic did better than expected.
  • DIY demand remained strong after stay-at-home orders lifted.
  • Construction demand far exceeded the lumber mills’ forecasts.

All of these caused an imbalance in supply and demand. While suppliers play catchup on orders, builders and traders have to submit orders without a delivery date or price. The domino effect does not stop there. Canadian imports into the U.S. market have seen lumber tariffs rise by more than an average of 20 percent.

The Associated General Contractors of America says the prices for construction materials has experienced the highest monthly and yearly increases in its 35 years of tracking the data. The situation is dire enough that AGC has issued a construction inflation alert.

“The construction industry is currently experiencing an unprecedented mix of steeply rising materials prices, snarled supply chains, and staffing difficulties.” says AGC.

The result is that many construction projects end up costing 20 percent or more than originally planned. For example, a new home construction project originally quoted at $100,000 may now cost $160,000.

What Can Construction Companies Do About This?

No one can control the tariffs or the shipping problems. However, staying on top of these issues will better prepare companies for potential supply chain issues that could affect project costs.

So, what can contractors and owners do? The alert advises the following:

  • Authorize adjustments to design, completion date, and payments.
  • Share realistic expectations on costs and possibilities of increases.
  • Give bidders accurate and thorough design information.
  • Add price-adjustment clauses for protection from material cost changes.
  • Discuss the best timing for ordering construction materials and components.

Refer to ConsensusDoc
for examples of industry-standard model language for clauses. For example, ConsensusDoc 200.1 Materials Price Escalation Addendum contains the standard contract document for dealing with price escalation.

And finally, AGC recommends adding security against theft and damage.

How Rising Construction Material Costs Affect Security

It’s not just the prices hurting the building process. The frail and unpredictable supply chain makes it challenging to estimate the time it takes to complete a project.

The cost of a small job of building an 18 x 38 garage structure is staggering due to the hefty increase in lumber and sheetrock prices. The penalties for delay only add to the stress. There is concern that the current trend of raw material pricing and availability might stall residential housing starts for both single and multi-family homes.

Conversely, experts believe many markets have a housing shortage. Not only that but also housing prices are escalating to cover the increases in materials costs. However, this doesn’t seem to be deterring homebuyers who are taking advantage of very low interest rates. So, demand is far exceeding supply.

Discussions with construction companies have revealed a great fear of losing construction materials and components. Along with the exorbitant rise in costs comes a bigger need to keep assets safe. Not to mention theft of materials, including lumber and plumbing plastics, has increased. Even small home builders are requesting construction security

When construction companies select the right construction security solutions, the ROI can be fast. This has never been truer with the astounding costs of construction materials and components as well as their capricious arrival.

The Best Construction Security for Fast ROI

Determining the return on security investment (ROSI) is hard but not impossible. It can be tricky if your business has not had a theft or incident. If you’ve had $20,000 worth of equipment stolen or vandalism, then that would help with calculating the ROI for security. This incident involves more costs than the price of the stolen item or vandalism repairs. You can’t calculate employee and visitor peace of mind. However, you can calculate the costs of not being able to work at all or do a full day’s work. There are big costs when projects are delayed. When things are stolen, it takes time to get replacements. Those lead times are getting longer. This causes big delays which is costing companies a lot of money

If the public learns about the crime or incident, it can affect the company’s reputation and the public’s perception of the construction site. Additionally,

If you’ve never had a major incident, don’t wait until something happens to act. Construction companies have a responsibility to keep their workers, contractors, visitors, and clients safe. Construction sites come with many risks beyond safety and theft.

The next step in determining the ROI on construction security is to look at the available security options and their benefits. Most security systems have a one-track mind. They can only achieve one objective. That’s not the case with remote video surveillance. It has the ability to proactively deter theft, save everything the cameras see, and cut liability risks on construction sites. It can also enhance construction fire protection.

Look for video surveillance that incorporates artificial intelligence and human intelligence. Humans are less effective without AI. Watching the cameras is a tedious job. Artificial intelligence closes the gap that comes with being human. It’s like putting a computer’s eyes on the entire construction site.

A security company programs many scenarios to tell the AI what to watch for and what to ignore. Innocent things like stray dogs and flying plastic can set off alarms. But not when you have well-programmed AI ignoring them. The pairing of AI and humans decreases false alarms and increases the chances of catching a suspicious activity.

As soon as AI identifies something suspicious, it alerts the on-call trained monitoring operator. The person checks out the footage and acts as needed. They may alert intruder through the on-site speaker and/or contact local authorities. Operators are safely located in another area far from the construction site. Their lives are never at risk, which allows them to take the best action to solve the problem.

Since video surveillance records everything, it provides all the needed evidence. Sometimes a complaint may come in weeks after the incident occurred. Video review specialists can quickly search for the incident and provide that to whomever needs it.

Put all of these together and you’ll gain a quick return on your security investment with remote video surveillance. Take a look at this case study that shows how video surveillance decreases theft crime and accidents.

With remote video surveillance, you’ll help protect your expensive assets and ensure worker safety. The rising costs of construction materials justify the need for efficient security.