Industry adjusts as materials shortages persist

The construction industry is still dealing with materials shortages and high prices

For the past 10 months, the Covid-19 pandemic has disrupted the world, and effects such as materials shortages persist.

Scarcity, be it in terms of vaccine distribution or food security, is a serious issue, and the construction industry still faces its own challenges with shortages of staples like lumber and steel.

The pandemic has strangled supply lines and forced increases in materials prices, and though there’s still more of the storm to weather, some signs are trending in an upward direction at the beginning of 2021.

Supply availability

The U.S. Chamber of Commerce Commercial Construction Index (CCI), a quarterly economic indicator designed to gauge the outlook for and resulting confidence in the commercial construction industry, reported Q4 2020 saw slight increases relative to the previous two quarters hit by Covid-19; however, index scores and other metrics are still lower than pre-pandemic numbers from Q1 2020.

According to the CCI, approximately 33% of contractors reported a shortage of lumber in Q4, and 41% of contractors reported that the pandemic severely lowered the availability of building products and materials in Q4.

In August 2020, Fortune reported that lumber prices soared 134% year over year (more on prices in the next section) after pandemic-related lockdowns caused sawmills to close temporarily, which resulted in a shortage of materials.

John Scepaniak, project manager with roadbuilding construction contractor Wm. D. Scepaniak Inc., said building materials were readily available for most of 2020’s first and second quarters.

“However, toward the end of Q2 and throughout the remainder of this year, we have seen lower availability,” Scepaniak said. “In comparison to [2019], materials and consumables had been taken for granted and [were] in relatively bountiful supply.”

For products and materials that the Holdingford, Minn.-based company uses internally, such as fleet vehicles and heavy equipment components, there have been longer lead times and decreased availability.

At least for Scepaniak, a strong supply chain network helped lessen the blow of the pandemic’s effect on their materials.

“We’re very fortunate in the Midwest to have a strong dealer and vendor presence in any direction that our projects take us,” Scepaniak said. “This year has challenged that a bit, but we are situated very well for the long term.”

Higher prices and backlogs

The relationship between supply and demand, a tenet of economics, states that scarcity of supply means prices increase, and that has borne out for the construction industry during the pandemic.

In a data digest, the Associated General Contractors of America (AGC) reported that lumber and steel prices increased at the end of 2020. Specifically, their producer price index saw a 29% jump in the price of lumber and plywood over seven months, though the AGC did note the index did decline by 15% from September to November.

The New South Construction Supply stated in its December 2020 newsletter that “rebar pricing has exploded” since its previous update – the site estimated an increase of $30 per ton before Thanksgiving and another $65 per ton weeks later.

Those price trends are affecting the overall costs of newly constructed homes: The National Association of Home Builders calculated that the 134% increase in lumber prices mentioned above has added approximately $14,000 to the expense of building a new home.

Scepaniak said though his company specializes in roadbuilding and processing sand, gravel and crushed stone, they have seen an upward trend in pricing for more niche products due to reduced supply and availability.

Aggregates and concrete products have seen slight pricing increases, Scepaniak said, which has resulted in higher prices for people buying homes and real estate.

Michael Bellaman, president and CEO of Associated Builders and Contractors (ABC), said his organization’s Construction Backlog Indicator (CBI) currently stands at 7.2 months, down significantly from its reading of 8.9 in March of 2020.

According to Bellaman, the highest backlog ABC recorded was 9.9. months in Q2 of 2018; the low was 5.8 months in Q4 of 2009. The currently dropping CBI shows that work is being delayed while new jobs aren’t coming down the pipe.

In terms of construction delays, Scepaniak said consumers can expect a large backlog to spill over into most of 2021.

Scepaniak said he recently talked with an industry colleague, who said the combination of 2020 backlog and already-booked 2021 jobs meant their schedule was already filled until August.

“Granted, this is one example in an extreme sense, but I expect delays across all areas of construction,” Scepaniak said.

According to the Q4 CCI, 83% of contractors are experiencing project delays due to Covid-19, and 68% of those contractors expect delays to continue into 2021’s second quarter. Additionally, the ratio of average current backlog to ideal backlog rose to 70 in Q4, which is only down from 76 in the pre-pandemic Q1.

“It’s important to manage expectations and be somewhat flexible as suppliers and producers will expectedly take a large portion of the next year to get back on track,” Scepaniak said.

Projections for 2021 and beyond

Given the immense economic, logistic, health and safety challenges posed by Covid-19 since March 2020, the construction industry is showing some signs of optimism going forward amid other negative projections.

Contractor optimism reached a peak for the Covid-19 period in the Q4 CCI, with 85% registering a moderate to high level of confidence in the construction market to provide enough new business for the next 12 months.

Expanding the scope to 24 months shows a slight uptick (86%) are moderately to highly confident in the industry.

However, the AGC and Sage Construction and Real Estate produced a survey that showed less-than-rosy expectations.

The survey included a net reading that compares the percentage of respondents who expect a market segment to contract to those who expect it to expand. For 13 of 16 categories included, the net reading was negative, meaning many more contractors are bracing for “a difficult year,” according to Stephen E. Sandherr, ACG’s CEO.

The retail construction market finished with a net reading of negative-64%, and the markets for lodging and private office construction both had negative-58% net readings.

“Demand looks likely to continue shrinking, projects are getting delayed or cancelled, productivity is declining, and few firms plan to expand their headcount,” Sandherr said.

Scepaniak said it’s important to not lose sight of the long term because economic shifts can be cyclical, which means the recent downturn could trend positive for “better days ahead.”

More practically, he said the lessons of 2020 taught many consumers the importance of budgeting and forecasting the supply of materials when planning for construction. Improvements in areas for both the business-to-business and business-to-customer spheres are needed, as well, he said.

“In 2021, the construction industry will hopefully employ the lessons learned in 2020 and make the necessary improvements throughout the supply chain,” Scepaniak said. “This past year was a bit of a gut check that exposes vulnerabilities within operations themselves.”