Welcome to “At Home With Tom & Sandy.”
Welcome to “At Home With Tom & Sandy.”
Sandy: Well hello, Tom, and happy June to you.
YIKES, YIKES, and more YIKES!!! What is going on with the cost of construction materials? I have never seen industry prices like this before.
Tom: Oh, boy. You said it! In preparation for this conversation, I talked with several contractors and some suppliers. And they are all shaking their collective heads.
Sandy: I have heard everything from COVID to the Suez Canal blockage to tariffs causing material supply issues and rising prices.
Tom: Me, too. It is amazing at how intertwined our economic systems are.
Sandy: The labor supply is no real big news to me. That is why the YCCA started the “Boot Camp” process a few years back. It was created to get younger people interested in a career in the construction industry.
Tom: And wow, were you were successful at that. How many souls got jobs from that effort?
Sandy: Thirteen, and I am proud to say they are still working in the industry for the original companies that hired them – all local.
Tom: But the labor problem has many facets to it. From young folks being drilled for years that college is the only route to happiness and success and eschewing the blue-collar jobs.
Sandy: COVID contributes to the shortage as well. With the stimulus package paying higher unemployment, the motivation to work is lessened for some. Not necessary the skilled trades, but the manual labor force as well.
Tom: True. Our readers need to know that construction costs are skyrocketing though. The labor shortage is only part of it.
Sandy: I agree. The price of a piece of OSB plywood ½” thick has almost tripled since this time last year. Can you imagine – $64 for a 4’x8’ sheet!
Tom: That is only the tip of the iceberg. Dang near everything is up 50% to 250%.
Sandy: People are still building like crazy, though. There is a lot of pent-up demand. Talking with contractors, the funnel is not slowing down.
Tom: It is almost the perfect storm of craziness. I do not think the average consumer has a clear picture of the depth of negative impact COVID has had on our economy.
Sandy: The industry is grateful that construction was considered an essential service in Arizona; that was not the same elsewhere.
Tom: Exactly. Let us look at something as simple as granite countertops. Quarry workers in other countries could not work because of the quarantine. Therefore, the granite is not mined, and the supply dries up. The demand is still there, just not the product. If the quarantine is lessened and some mining is done, the next cog in the wheel is shipping. Cargo ships are sitting in Long Beach harbor waiting to be unloaded.
Add to that a trucking shortage. I think I heard it takes more than 800 trucks for a ship to be unloaded. And stacking container space has swallowed up the docks.
Sandy: That same scenario touches almost every aspect of the supply chain, including mining for aluminum windows and manufacturing – everything from a 2 x 4 to sinks, mechanical equipment – you name it.
Tom: In the last year, many facilities were either shut down completely, or partially opened then shut down multiple times, adding to the low supply.
Sandy: And the high demand all leads to the classic economic theory of supply and demand affecting the price of a service or commodity.
Tom: What our readers need to know is how the construction industry is handling this craziness. Estimating a project normally takes a few weeks – depending, of course, on the project’s complexity. Before the pracademic, a supplier or subcontractor would hold their numbers for 30 to 45 to 60 days. I am told that currently, seven days is the max.
Sandy: I have heard that also. How can anyone sign a contract at a fixed price when the project might take three, four, six or 12 months to complete?
Tom: Therein lies the dilemma. Some of the tools being used are pre-orders with price guarantees. This works for some products but usually not the most volatile.
Sandy: One could delay construction until things settle, but we are not really seeing a lot of that.
Tom: Some savvy contractors and smart owners are agreeing to a shared price clause in the contract. That allows a project to move forward with both parties agreeing to something akin to a floating cost. This allows the project to move forward without delays because of price increases.
Sandy: Contractors are also going to cost-plus contracts.
Tom: Prices are rising. Construction materials are surging amid higher demand and as we talked about earlier in our column, supply constraints are big.
Sandy: I have seen construction costs rising since last June and we know the increase is having a big effect on the residential construction industry. Everything from lumber to asphalt to cement to insulation has soared in price as the home-building industry has heated up.
Tom: When this thing called the pandemic happened, many suppliers cut their output, expecting that the subsequent economic disruption would cause severe reduction in demand.
Sandy: Tom, that drop in demand never occurred and because the industry was deemed essential, we avoided a shutdown. In fact, home building and renovation have been leaders in the post-pandemic economy.
In one year, from March 2020 to March 2021, lumber has increased 83%.
Tom: From everything I have read, prices show no signs of abating amid the surge in home building driven by the receipt of stimulus money and higher consumer saving because of stay-at-home restrictions. Remote work is also supporting the trend, with many people forced to live, work and play at home.
Sandy: Adding to the squeeze on supplies, wildfires struck the Pacific Northwest last fall, burning through forests slated for market. Many construction companies and suppliers have turned to central Europe to fulfill lumber orders. Forest Economic Advisors has stated that it expects lumber imports in the United States to rise 14% to 15% for 2021.
Tom: The takeaway of this is: For construction companies, higher material and shipping costs are adding to margin pressures. Through the past year, final demand pricing for construction services has grown only 2% year over year through March. This means that contractors are absorbing these cost increases without passing them on to their customers.
Sandy: Tom, our region is growing and there is no doubt about it – the housing market and the construction industry are two strong sectors keeping our economy going.
Thanks for stopping in to read At Home With Tom and Sandy. You are in good company and we love sharing educational, fun and important information with you. QCBN
Tom Reilly, Architect, Renovations, 928-445-8506 renovationsaz.com
Sandy Griffis, Executive Director, Yavapai County Contractors Association, 928-778-0040
Remember to tune in to YCCA’s Hammer Time every Saturday and Sunday morning 7 a.m. on KQNA 1130 AM/99.9 FM/95.5FM or the web kqna.com. Listen to Sandy and Mike talk about the construction industry and meet your local community partners. Hammer Time is a great way to start your weekend.