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How Should You Plan When No One Else Can?

Managing your response to the supply chain issues is more complex than just switching vendors. And incorporating these changes into your 2022 budgets requires more than just a contract rider with a price escalation clause.

My son is an estimator for a large construction firm. He recently transferred from a similar position on the East Coast to the Midwest. Last weekend was his first to our lake house that we bought on the shores of a small lake in Southeastern Wisconsin last fall. We have hired a local contractor to transform this nearly 100-year old building into the future setting for many family gatherings.

As my son walked around the renovation work, he asked typical questions. How many bids did you get? How do you know if what your paying is right? And do you think you’ll come under budget?

I listened to him for a few minutes, then went and grabbed him a refreshment from the cooler, he needed to calm down. It’s a small project, handled by an experienced contractor with a great local reputation.  So my answer to all these questions were in order: one bid, the bid seems to match the going rate for renovations of this type and scope; and I haven’t a clue, but the limit I set for this project I won’t be digging too much into my life savings.  

My son’s concern about to handle the unknown of construction prices and costs have been exuberated by the current market and supply chain conditions. How should producers and contractors plan?

Managing your response to the supply chain issues is more complex than just switching vendors. And incorporating these changes into your 2022 budgets requires more than just a contract rider with a price escalation clause.

So we head into the post summer season that includes plans for 2022 capital and operating budgets, I thought I’d highlight some insights from the current round of economic data being published about our industry.

I guess the recent comment about the June Economic report on non-residential by ABC Chief Economist Anirban Basu, sums up the problem. “For economists, this [current market] presents a bit of a paradox,” said Basu. “Many contractors report rising backlog and strong expectations for sales, staffing and profit margin growth over the balance of the year, according to ABC’s Construction Backlog Indicator and Construction Confidence Index. Yet the macroeconomic data continue to show an industry struggling to stabilize from the pandemic-induced recession.”

So my understanding of this comment is yes there is business and work to be done, but things that were once taken for granted have drastically changed. Producers and contractors can’t be in control of simple tasks such as knowing prices and even availability of goods.

Jeff Yoders, ENR Midwest Editor and Associate Technology Editor, describes some of the challenges contractors are facing this summer with procuring materials in his article focused on the ENR 2021-2nd Qtr Cost Report. Yoders wrote that “Several contractors working on everything from transit systems to high-rise office buildings say that the cost of lumber, particularly for use in concrete framing, is hurting their bottom lines.”

 

In mid-July, the Association of General Contractors “cautioned that rising materials prices are making it difficult for many construction firms to benefit from the re-opening of the economy, undermining the sector’s ability to add new, high-paying jobs.”

In the same report, they warned that “in addition to increases in materials costs, transportation and fuel costs also spiked. The index for truck transportation of freight jumped 15.4 percent. Fuel costs, which contractors pay directly to operate their own trucks and off-road equipment, as well as through surcharges on freight deliveries, have also jumped.”

So, what should producers and contractors do? The simple advice is to be calm and stay informed. Paying attention to local and national trends will help you be aware of how to manage your customer expectations at bid time. Work on developing stronger vendor relationships. And just as important, look at your operations to find ways to incorporate new technologies and approaches that can help you hold on to margins and conduct your activity more efficiently.

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