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Keeping it Together

The supply chain crisis and its impact on construction

March 16, 2022 Photo

Over the past several years, the term “supply chain” has become a common word in the vocabulary of the general public, more so since the emergence of COVID-19 in 2020. Certainly, before the pandemic, many took the supply chain for granted: It was a silent operation working in the background with most, if not all, of the issues being easily greased back into operational functionality.

But times have changed and the world is facing multi-dimensional changes in the supply chain evolution. These disruptions are not over, and supply chain issues are expected to continue well into 2022 with no immediate relief in sight.

To put it in simple terms, supply chains involve any/all activities necessary to deliver a wide variety of goods and services to the ultimate consumer. It includes production of materials and/or component parts throughout the manufacturing process, from raw materials to semi-finished or finished goods delivered from a supplier, wholesaler, or retailer to a customer.

When supply chains are disrupted, by any number of disturbances or problems interrupting an activity or process, the disruption produces a ripple effect that can impact any or all of the entities involved in the production and delivery of the goods and services. This slowdown affects availability of materials, labor, and shipping, which ultimately impacts the end user. It is not just the production and manufacturing entities that are impacted. Uncertainty and disrupted supply chains also affect management, resulting in poor oversight and inefficiencies that negatively impact a company’s productivity, operations, expenses, and ultimate profitability. Ultimately, there are many unknowns that continue to emerge as a result of uncertain times, even as the supply chain issues attempt to return to old world normality.

The Impact on Construction

Supply chain bottlenecks, congestion, and blockages in production have had an adverse impact on a number of different industries in different ways. The construction industry, in whole and in part, is facing its own set of concerns as it struggles to respond to the new normal stemming from pervasive supply chain disruptions. As there are so many moving and often intertwined parts, the construction industry has been plagued with a series of overlapping shortages, which have led to construction delays. Some of the major supply chain challenges include availability of raw materials, unstable production and manufacturing of goods and services, shrinking labor force, increasing transportations costs, volatile consumer demands, and availability of technology.

According to Pardis Pishdad-Bozorgi, associate professor in the School of Building Construction at Georgia Tech, in comments made to the college’s Mercury platform, the pandemic has had a “snowball effect.” Just as this is common for many other industries, the construction industry is suffering due to “supply challenges related to production of materials and receiving them on time for projects due to the pandemic.” Shortages are more than a local concern, rather it extends to a national and worldwide crisis.

Pishdad-Bozorgi further explains that the supply shortages “stem from a series of supply chain disruptions hitting industries around the world.” This includes, but is certainly not limited to, port congestion, labor shortages at factories, unusual weather conditions slowing the production of building materials and semiconductor shortfalls.

A major reason for the supply chain backup is due to the shortage of workers to keep the goods moving down the line. Without workers available to make, ship, or install the product,  the basics of simple economics will prevail: As availability of supplies decreases, demand increases, as does price, ultimately affecting price inflation for all involved. Wage increases along with an uptick in “quit” levels are becoming increasingly common. Because COVID-19 has disrupted so many supply chain platforms, construction has seen significant increases in lead time and prices, which resulted in a decrease in productivity and availability. National shortages have been married with additional overseas shortages affecting the supply chain momentum. Construction companies have been faced with finding ways to manage shortages and delays in some instances while creating means and methods to move available supplies to different sites to avoid additional delays.

Increased Costs

From a business standpoint, supply issues, housing shortages, and inflation are creating the perfect storm for builders. According to a February 2022 FOX Business article, many homebuilders are feeling an “inflation pinch as the industry stares down rising costs and ongoing supply delays.” This unexpected chokehold is stifling production of residential housing as well as commercial projects across the board.

In the Fox Business article, National Association of Home Builders CEO Jerry Howard emphasized that the biggest problem stems from increased building material costs and the delay in getting them. Skyrocketing prices of building materials coupled with ongoing production shortfalls created delays of up to five months; sometimes longer. This display does not only impact raw materials such as wood, steel and glass, but also other items necessary to complete a project that may include cabinets, trim, garage doors, appliances, lighting fixtures, and electrical inventory.

Fox Business also addressed the skyrocketing costs of materials that have created major concerns. Since last year alone, lumber prices jumped over 35%, with the highest levels observed in mid 2021. This not only impacts the builder, but also the ultimate consumer as costs are passed through to home buyers and renters alike, with first-time buyers the hardest hit.

Statistics from Trading Economics confirm that the price of aluminum has also jumped over 56% during the past year and is slightly short of a record high of $3,300 per ton. NAHB Chief Economist Robert Diest has stated that “overall construction costs are up 21% year-over-year. The increased costs coincide with the 30-year fixed-rate for mortgages, the largest single-week increase since march 2020.” All the cost impacts are anticipated to continue in 2022, and the industry will continue to see a reduction in affordable housing and a shortage of resale inventory.

Moving Past the Problem

While there is very little that can be done to undo the most recent supply chain shortages, there are creative and innovative ways to work around these modern-day problems. Collaboration is crucial to the overall success of any construction project, and now, more than ever, parties must work together in the early stages of construction. Key players must be aware of the materials needed as well as lead times to ensure project completion is timely. Realistic deadlines that include expansion for delays would serve to reduce unexpected costs and over-budget concerns.

The agile supply chain could be described as a system built to address unpredictability; one that waits to see what the market will dictate before finishing production. Based on the events of the past 24 months, the supply chain seems anything but agile. In order to deal with ongoing disruptions, it is clear that the modern-day supply chain will need to be built on a more flexible and resilient foundation. This foundation must quickly adjust to seen and unforeseen circumstances and adapt accordingly. It also includes foresight in order to avoid potential shortages as well as overstocked inventory.

In order for the construction industry to be successful in leveling disruptions and developing new improved methods, technology needs to remain at the forefront of a cutting edge solution. Now, more than ever, technology is finding a permanent residence in the world of construction and playing a pivotal role in how goods are delivered to consumers. During this evolution process, the focus will remain on developing a smooth delivery of all aspects of the supply chain embraced by the construction industry.

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About The Authors
Multiple Contributors
Lisa Unger

Lisa Unger is senior claims examiner at Markel Corporation. She can be reached at lunger@markelcorp.com

Pete Fowler

Pete Fowler is the founder of Pete Fowler 
Construction Services, Inc.  pf@petefowler.com

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