I try to refrain from writing about the economy because I am not an economist and feel unqualified to make predictions about inflation, unemployment or the stock market. Sometimes, I think the professional economist is guessing, as well. I think a selection of people make good prognosticators of the future for our industry. They would be the construction executives at the highest level. These people are the CEOs of enormous construction firms and employ hundreds or have contracts in the millions of dollars. Their large companies rely on them being accurate at predicting the future. Hundreds of jobs, millions of dollars—and most of all—an unforgiving board of directors, will make them pay for getting it wrong. They spend time and have significant resources at their fingertips, making them better at predictions. So what do they say?
Construction executives have cooled their expectations about the foreseeable future of construction. This is primarily due to worries about price inflation and supply chain issues surrounding materials combined with persistent labor shortage concerns. The AGC reports 14 percent of these top executives felt a more prolonged and possibly deeper slowdown is likely on the horizon. While this appears to be bad news, those same executives also display optimism about rebounding down the road. There is a reason they feel this way and it is all about the numbers related to inflation.
First, the bad news and the reason for a pessimistic near future outlook: The AGC also reports construction materials have risen 27 percent in cost during the last 12 months with no immediate relief in sight. Materials account for about 50 percent of a contractor’s budget on signed contracts with few options for relief. Add to the fact most contractors routinely work on a 10 to 15 percent profit margin translates to no profit or even a loss on projects under contract. Bids on future work will have to go up, pushing inflation. (There is good news coming; just hang in there.)
Tariffs implemented on imports from 2018 to 2020 did not help the cause of keeping material pricing in check. Since many products are from overseas, the hit was hard. The inflationary increase of a material can depend on that specific material. For example, steel has been one of the most brutal hits of all the commodities and likely because we import a lot of steel. Another material hit hard was construction plastics. This was due to the double-whammy of the Texas cold snap back in February of 2021. This extreme freeze crippled Texas and resulted in shutting down the petrochemical plants.
Turns out most of these plants are located in Texas. These plants produce most the resins, plastics and additives used in our industry. The cold spell also resulted in damages that that took time to repair. The plants were not just down from the cold for a few days but several weeks afterward. The higher-than-normal demand for PVC piping from that same industry added to our misery. This is because homes also had bursting pipes; demand was through the roof and supply was nonexistent.
One reason for some optimism was that those same executives know the history of the building industry. Construction tends to be somewhat volatile about inflation, pricing and recent history.
In 2004, overall construction inflation suddenly climbed to 10 percent. It took two years for that inflation level to fall back to the acceptable level of 3.2 percent. In just two years, inflation again shot up to 12.9 percent, then dropped in 2009 to 5.8 percent. The takeaway for these executives is to remain calm, plan conservatively, take steps to protect yourself and your company. It is unlikely we will see materials drop significantly in price when inflation subsides. The best scenario is that bid prices for contractors climb to compensate for increase and the increases slow down to acceptable levels. This is what top executives do predict to occur, it just may take a little longer to sort itself out. In short, we will get through this as it will end.
While this is promising news, it is of little help to the subcontractor stuck with signed contracts, escalating materials cost, supply shortages and labor issues. There is some advice from professionals to these subcontractors. Monitor pricing on all materials; this means gathering and holding any and all information on price escalations, especially from third-party sources. While most projects do not have material escalation clauses, you may be able to reach out to the building owner for help. You may get a building owner to see that re-bidding will lead to even higher costs than your modest increase request if you are forced to walk away. It might be worth a shot and better than the alternative. The trick is to hang in there; it will turn around.