How to Manage Construction Material Price Fluctuations
Current Cost Fluctuations Are Unprecedented
If you’ve been in the construction industry for even the past five years, you know that ups and downs are to be expected, especially when it comes to material costs. Costs fluctuate based on a wide variety of factors, most of which a contractor cannot fully control. These include tariffs, over-reliance on importation, infrastructural deficits, economic events, changes in supply and demand, and unfortunately, even profiteering.
Of these, there are two that can come together to create the perfect storm: economic events and changes in supply and demand. When production can’t keep up with demand, we see high prices; when production keeps up, prices stabilize; and when demand drops, we see low prices. When changes in the supply and demand chain increase too quickly, it can create a domino effect that leads to major economic crises that then creates instability, as seen in dramatic price fluctuations.
How It Happens
In the early 2000s, prior to the Great Recession of 2008, material prices skyrocketed. Emerging markets in places such as Africa and South America played a huge factor in increased demand, but unfortunately, production could not keep up, resulting in exorbitant prices. As a result, project starts and related construction activity significantly declined.
Demand dropped back down and so did prices. This dealt a blow to manufacturers: previously, they could afford to over-produce because they would only encounter a lower profit margin rather than a total loss. But during the Great Recession, over-production meant a total loss and possibly even bankruptcy for a manufacturer.
Unsurprisingly, the construction industry was the first to feel the effects of the recession, and they were also the last to recover from it. The Great Recession officially ended at the close of 2009, but the construction industry did not return to pre-recession levels of output until a few years later.
If this sounds familiar, don’t be surprised, since we’re living through a similar economic crisis right now. Unfortunately, unlike the Great Recession, the impacts that the current pandemic is having on material prices and the construction industry is absolutely unprecedented. While the 2008 recession was brutal in its impact, it and other events like it were actually quite predictable because they primarily affected a select few sectors. The fluctuations caused by COVID-19 responses and policies are not at all predictable because every single sector is being affected: steel, textiles, concrete, brick, lumber. Nothing is untouched.
As concerning as this is, it’s also true that unlike the 2008 recession—which struggled to recover— the COVID-19 era economy seemingly “bounced back” pretty quickly. JD Supra notes that construction activity, in particular, began to strengthen once policies started to relax around the fall of 2020, and by March of 2021, new orders for materials and parts were especially strong. But this bounceback is tied to inflationary pressure, and as inflation continues to rise in assets like oil and steel, the Federal Reserve will soon start to increase interest rates on these raw material assets.
On top of all of these challenges, the historic labor shortage affecting the entire economy has led to a lack of drivers and transportation available to deliver materials, extending delays in receiving products that are already scarce. As a result, cost impacts and delivery delays are being felt at some of the most critical steps of a project: bidding and construction.
What You Can Do
All of these obstacles are intimidating and have the opportunity to inflict some serious damage to the industry. But it’s also an excellent opportunity for innovation and transformation. It’s easy to fall into complacency or to put off chronic problems when the road is smooth. When challenges emerge, though, it’s much easier to see gaps in processes.
Now that we know just how serious the problem is, how do we start to tackle it?
Keeping abreast of the latest industry trends is one answer, but there are a few other practical moves that you can make as well.