Fueled by global supply chain shortages, contractors traded product certainty over pricing, fueling higher non-residential construction prices in the fourth quarter and well into 2022.

Despite early recognition as an essential industry or perhaps because of it, contractors have not been immune to the supply chain shortages that have affected large segments of the global economy. Commodities such as steel, copper, plywood, and other raw materials have been in short supply for months due to labor shortages in the manufacturing and logistics sectors. The limited capacity of semiconductor manufacturers has led to delays in equipment, vehicle, and appliance orders.

These are all well documented and construction prices have skyrocketed as a result. But what work arounds are there to offset this phenomenon and how long will these price increases last?

Some suppliers have turned to domestic producers of currently imported materials, but many are looking to alternative products to fill backorders. For instance, products such as prefabricated, sustainable cross-laminated timber (CLT) consists of planks (or lamellas) of sawn, glued, and layered wood, oriented in perpendicular layers to create structurally rigid supports in multi-story and long-span applications comparable to steel and reinforced concrete. CLT production when used with sustainably sourced wood provides for reduced environmental impact, cleaner, dryer worksites, and shorter erection times (Brandner, 2013) (Brandner & Schickhofer, Production and Technology of Cross Laminated Timber (CLT): A state-of-the-art Report, 2014). Other steel replacements, such as concrete planks, that are much easier to get but more expensive to purchase and install are being considered again as they reduce construction times.

Shortages in certain types of resins used in fiberglass as well as increased use of mineral wools has led to the introduction of new materials, such as hemp insulation. Hemp is a fast-growing plant, with as little as 70 days from plant to harvest. Hemp insulation is a composite material consisting of as much as 92% hemp and 8% polyester fibers.  It is typically placed in 3 ½” – 5 ½” sheets or batts and has a thermal resistance value (R-value) of 3.5 per inch of thickness which is comparable to fiberglass and mineral wool. U-value measures heat transfer, and conversely from R-value, the lower this value, the better. Hemp has an excellent U-value of .039, which is comparable to roughly 8” of fiberglass insulation in walls. Although slightly more expensive than mineral wool, hemp wool is completely recyclable and sourced at several manufacturers in the U.S. and Canada such as HempWool® and HempTech Global.

Alternative materials are only one part of the equation as increasing steel prices are forcing some contractors to re-negotiate and/or re-bid preordered materials to salvage budgets and schedules. Although some analysts foresee steel prices retreating as pandemic-idled capacity comes back online, structural metal prices are expected to rise 22.8% overall in 2021, while fabricated structural sheet will increase 23.8%, according to IHS Markit’s third-quarter forecast.

Figure 1 – Forecast HS Global Insight Historical Data

Although not ideal from a vendor relations standpoint, re-bidding is often the only way to tell if price hikes are real or simply price gouging on the part of suppliers. As a strategy, it could strain relations between contractors and suppliers and may not always net the intended results particularly as prices could bid higher.

In some circumstances when companies are faced with this level of volatility, it may be best for contractors, suppliers, and even owners to cooperatively discuss these costs and schedule challenges to best determine the path towards project success.  It may be a combination of alternative materials, pricing strategies, and even delaying the start of the project that ultimately results in the best outcome for the project.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

 

Bibliography

Brandner, R. (2013). Production and Technology of Cross Laminated Timber (CLT): A state-of-the-art Report. Austria: Institute of Timber Engineering and Wood Technology, Graz University of Technology.

Brandner, R., & Schickhofer, G. (2014). Production and Technology of Cross Laminated Timber (CLT): A state-of-the-art Report. Retrieved 10 8, 2021, from https://graz.pure.elsevier.com/en/publications/production-and-technology-of-cross-laminated-timber-clt-a-state-o-2