Rise in Material Costs and How they are Affecting the Construction Industry

According to a Minneapolis Fed poll conducted in late May, rising building material costs are affecting project demand and earnings in the construction sector.

High input prices had a negative impact on demand, according to 65% of survey respondents, while profits had a negative impact on 70%. Higher labor costs are one factor, but the majority of the business has cited material costs as a greater challenge. The majority of respondents stated the cost of building supplies had risen by 10% or more in the last three months. This is on top of previous price hikes.

As a result, building prices have risen so fast that many people are experiencing extraordinary interruptions. Some respondents, for example, stated that appraisers are unable to validate increased house prices using comparable properties, which is a concern for home builders across the country. Suppliers, according to some, are hesitant to lock in pricing for more than a week, if at all, causing a lot of uncertainty. The uncertainty and fluctuating prices have caused major turmoil in the construction industry as a whole. Contractors are being forced to bid much higher on projects as unexpected increases in materials continue to make way.

The surge in material prices is prompting developers to reconsider whether or not to start new residential and commercial development projects that haven’t yet begun. According to the Atlantic Council’s Director of Global Business and Economics Program, Bart Oosterveld, if tariffs remain in place, they will influence a variety of industries and pricing, including automobiles, appliances, and e-commerce.

He says that the larger the developer, the simpler it will be for them to get a consistent supply of steel at a fair price due to their negotiation position. He also adds that smaller developers may not have the same bargaining leverage as larger developers and may be unable to pass on any cost increases to their customers. As a smaller contractor, in order to compete with larger firms with more capital you have to be able to offer your potential customer similar offerings that larger companies have right at their fingertips. Without this type of material leverage in the current market, smaller businesses will struggle to win bigger bids that have the potential to increase their annual revenue and take their business to the next level. Also, as the hiring shortage continues to cause stress within most industries, companies with larger budgets can tack on hiring bonuses quicker and easier than smaller companies, once again leaving little space for small businesses to compete with big-name companies in the current market.

With the number of open positions available at a record high, and unemployment also at a record high, you would think that the two would cancel each other out, but we have yet to see a clear change in the current hiring market which has had a negative impact on the growth of the construction industry in 2021. Between supply and employee shortages, many companies are at a complete standstill in terms of growth possibilities thus far.

Supply Shortages are Affecting Everyone

Due to supply shortages, a record number of building material companies have declared price increases. This shortfall of supplies is predicted during the next 12 months due to disruptions in the supply chain, a lack of accessible shipping containers, and a reduction in port employees. The Construction Products Association (CPA) is the latest to raise concerns about this scenario, which might have long-term consequences for the construction sector and all contractors with fixed-price contracts.

According to the CPA’s current State of Trade study, over 97% of companies dealing with heavy side items such as lumber, concrete, and steel expect prices to stay high in the coming year. This is the greatest level of participation since the study began in 2011.

According to the same poll, 92% of firms dealing with light side items such as insulation, fit-out material, and glass expect prices to rise in the coming year. Almost all of the firms that took part in the poll said that the cost of raw materials had risen in the previous year, and that total costs would continue to rise in the next year.

In the first quarter of 2021, 82% of light side manufacturers and 77% of heavy side manufacturers agreed that prices grew higher, compared to 61% and 6% in the final quarter of 2020. These figures demonstrate a downward trend in global material costs.

The global oil market, which was down in 2020, is now rising, which has resulted in an increase in building prices. Energy prices have risen as global oil prices have recovered, according to 73% of heavy side businesses and 51% of light side firms. In addition, in the first quarter, 50% of heavy side businesses and 48% of light side firms reported an increase in salaries and wages.

Logistics difficulties were also reported to be a cause of raw material shortages, according to the CPA study. 40% of light side manufacturers and almost 33% of heavy side manufacturers had their sales growth stifled as a result of these factors. These are the highest percentage ever reported in the survey’s history.

Iron ore has virtually doubled in price in the last several months, while sawn wood has increased by 30%, copper by 49%, aluminum by 23%, and gravel, clays, and sand have increased by 20%. These numbers underscore the issue of rising material costs, which, along with supply concerns, might hurt the construction industry as it recovers from the shutdown.

According to an IHS/CIPS poll, raw material delivery times have increased in the sector, with 41% reporting lengthier delivery times from suppliers in March. The CLC cautions that shortages will certainly worsen in the coming months, and businesses should prepare for lengthier waits. Contractors should brace for a “perfect storm” of interruptions and price rises in the coming months as a result of post-Brexit trading regulations, covid-related logistical problems, and global rising oil costs, according to Core Five.

Customers are charged for costs that are passed on to them

The majority of responders said they passed on material cost increases to their clients. For example, 66% of respondents indicated they increased expenses for consumers in the same range as those who claimed their price hikes were 10% to 25%. However, some people passed on less, while others passed on more.

Some contractors who signed contracts last year before the surge in material prices took place have found themselves in a huge and unexpected predicament as the rise in materials was not originally calculated and included in contracts signed in 2020 with start dates in 2021.

Those that charged clients higher rates than their real material costs did not respond to the poll. However, given the inability to employ escalation clauses, it’s possible that some companies are asking customers to pay more in anticipation of future increases in material costs.

Additional tariffs will continue to affect businesses and a variety of industries across the country as material prices continue to rise. Not only are project delays and budget overruns on everyone’s minds, but millions of people’s jobs are on the line as a result of increased material prices.

Fortunately, as material prices continue to rise, there are various options to help reduce material and labor costs inside the building envelope. Design may be tweaked and optimized to utilize less material, panelization can help save materials and decrease waste, and technology is always improving and assisting in the development of new inventive solutions. Only a few creative ideas, such as optimizing designs, manufacturing in a controlled environment, and improving technology, are helping to transform the construction sector and offset the rise in material prices.

We can help you with understanding the material costs. Do you have any questions regarding costs, bond types or need advice on the construction industry as it stands right now? Give us a call to speak with one of our surety bond specialists at The Surety Place.