Deciding Who Will Pay for the Steadily Rising Materials Costs

Article originally posted on Globe St. on October 13, 2021

Survey shows that construction teams will pass along costs, or use alternative materials.

When it comes to inflation, supply chain management and rising materials prices in the construction industry, many agree that the repercussions of what has been seen over the past two years could be long-lasting, reports Fixr, according to a survey of 100 construction firms in September.

One anonymous construction worker told Fixr, “I will probably go out of business because I can’t raise my prices, accordingly.”

Don Adams, general manager of Regional Foundation Repair, predicts that, “It is foreseen that in 2022 lumber prices will drop again to pre-pandemic levels, but until then contractors will not have the work they need to keep their businesses afloat.”

And Sarabeth South, home design expert for Fixr.com, also sees more challenges ahead by stating, “Given the labor shortages, I predict that the biggest cost increase in the future will be labor, rather than materials.”

Not everyone agrees that the outlook is so negative, though. Gregg Cantor, President/CEO of Murray Lampert Design, counts himself lucky saying, “We are fortunate to be in a city where the material increases have not affected us. There is a shortage of housing in San Diego and property values continue to rise. I think we have seen the worst of material increases and shortages.”

Both homebuilders and homebuyers are facing unprecedented price increases in building materials as one of the many ramifications of the pandemic. Hopefully, the next few months will shed some light on whether prices will return to normal and what we can expect for building projects moving forward.

Diesel Fuel, Particleboard, Fiberboard Biggest Gainers

Some of the materials that have seen the biggest increases in price are beginning to decline. Only time will tell if prices will remain unpredictable or if things can begin to return to some normality as we approach 2022.

Overall, No. 2 diesel fuel and particleboard and fiberboard products increased the most from their lowest to highest point during this time frame by 201.02% and 190.30%, respectively.

Both lumber and plywood increased over 100% in the same time frame (121.08% and 139.89%, respectively). Other notable materials that saw huge increases were steel mill products (123.14%) and copper wire and cable (101.05%).

Diesel fuel’s use in the construction industry is predominantly tied to transportation. This includes the transportation of other materials to lumber yards, suppliers, and job sites. This fuel is also used to power heavy equipment, such as excavators and bulldozers, making it more expensive to run these machines.

Particleboard and fiberboard have numerous uses, some of which are tied to plywood. They can be used to create cabinets, furnishings, built-in bookcases and entertainment centers, and surfaces for a wide variety of areas in and around residential buildings. Lumber and plywood both also fall into this category, but these materials can be used in many ways that particleboard and fiberboard cannot because the two former materials cannot handle the same amount of exposure to moisture. Lumber, in particular, is used for framing, while plywood may be used as exterior sheathing.

How Professionals Are Dealing with Increases

Homebuilders have taken a multi-prong approach to dealing with the building material price increases. When asked to choose between one and three options, the majority of homebuilders surveyed said that the main way they are coping with higher costs is by increasing their prices to cover it; 66% of respondents revealed they have raised their prices, accordingly.

Some construction professionals say that they have focused on the way they use the materials; 23% are using alternative materials. This way, they can do the same job but at a more acceptable price. Yet, this could entail benefits or drawbacks depending on the replacement material chosen, which may not be applicable for all projects. Another 23% share that they are reducing their waste of materials to maximize the bang they get for their buck.

Many are including price escalation clauses in a fixed-price contract. One-fifth have introduced these clauses to deal with the price hikes of materials. Whereas these clauses can protect them from rising prices, they may also lead to lost contracts if homeowners are not willing to take on the risk of a potential price change mid-project.

Optimizing designs to use fewer materials is an approach that 18% say they are using. Some are pre-ordering and paying for lumber at today’s price, especially now that it has decreased substantially since its record high, in the fear that prices could rise again; 17% of respondents use this method to help guarantee the price remains level for the duration of any projects on the books.

But this requires money upfront and a risk of prices falling in the future. For those who are not pre-ordering, many are opting to secure price guarantees from their suppliers for a period of time.

Only 15% of homebuilders have cancelled or postponed projects as a way of dealing with the issue, and 12% have opted for using advanced technologies. Just 8% reveal they have had to lay off staff.

Can’t Be Too Choosy with Appliances

Adding to the pain has been the availability of appliances for new construction, particularly in multifamily housing.

Ryan Kimura Senior Vice President of Strategic Partnerships at Premier, a Dallas-based design & architecture, procurement (FF&E, OS&E and construction materials) and construction firm, tells GlobeSt that the costs of goods haven’t really gone up per se, but developers are having to look at other appliance options that they may not have before.

“If they wanted GE, well, there may only be Frigidaire or whatever is in stock,” Kimura said. “So, they have to choose a different brand of appliance or wait on the brand that they want.

“The delays are something all developers have to deal with, but hopefully you have a strong supply chain so that when the products do reach the United States they can get to the property without delay. “Working with a partner who has a strong supply chain is a must during this time.

“Also, developers are ordering and storing/warehousing items if they can so that supply chain or product availability doesn’t hinder or delay their development.”

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