How the Rising Costs of Construction Materials Could Affect You
No matter what kind of work you do in the industry, the rising cost of building materials has inevitably affected you at one point or another. But how exactly did the fluctuating prices happen? And what does it mean for you and your business? That's what we want to analyze.
In this blog, a fundamental understanding of how the rising costs of construction materials could affect you will be outlined in addition to valuable background knowledge that'll put this entire situation into perspective. Here are the topics we will cover:
Pre-Pandemic Rates & the Increases Since
Before the summer of 2020, the cost of common building materials like steel, lumber, and concrete acted fairly stable for the past decade in relation to inflation rates. For both obvious and more complex reasons, the cost of those same building materials has fluctuated constantly since then.
Although you may already be familiar with some of these reasons and even experienced them personally, we wanted to provide a brief overview of the overall building materials' cost-climate during the past two-and-a-half years.
As a general disclaimer, this section isn't meant to provide an in-depth, expert perspective on the economics of the building material industry. It is, however, meant to explain the recorded price-rate trends of both the overall building material industry.
As visualized by the above graph, the price rates of the overall building material industry saw two significant spikes. The first spike in price came during the later stages of summer 2020, whereas the second spike in price came during the earlier stages of summer 2021. In addition to these price jumps, the average overall price rate of building materials like steel, lumber, and concrete has also raised throughout the past two years. As shown, even when these jumps in price settled back down, the rates are still noticeably higher than in pre-pandemic times.
Keep in mind that the above graph represents the producer price rates for the overall building material industry and not any individual item. That said, some heavy side items are worth taking an individual look at.
For example, the cost of lumber skyrocketed during the past two years. Especially during the times of the price jumps featured above, the cost of lumber was, at one point, around five times more expensive compared to its pre-pandemic rates. It's safe to say that lumber may have exhibited one of the worst, or at least the highest jumps in price out of all building materials. Another great example of this is the cost of steel, which also took a hit. As of this publish date, the cost of steel has essentially doubled from its pre-pandemic rates. This jump in price can be seen not only in the cost of the raw material but also in the cost of heavy equipment, especially regarding their attachments.
It's easy to blame these price trends on the pandemic and the restrictions that came with it, and somewhat rightfully. However, if you dig a bit deeper, you can see that there were many moving parts that explain why this all happened.
Understanding Why This Happened
More than anything, the pandemic acted as a catalyst when it comes to these price jumps. In other words, there are more technical reasons that explain why these jumps happened, though it is largely the pandemic that triggered them.
One of the more commonly known reasons for the price spikes was supply chain issues. Specifically, supply chain issues due to illness, government restrictions, and labor shortages in both the transportation and manufacturing sectors.
Due to a combination of the complications mentioned above, the transportation sector saw some disruptions. This aspect of the supply chain is especially important because, without a well-oiled transportation system running smoothly, the delivery of raw materials to manufacturers and building materials to suppliers is no longer meeting everyone's demands.
In addition, this resulted in a labor shortage that proved to be harmful to the operations of manufacturers. This resulted in a decrease in the production of building materials, thus making available building materials scarce.
There were also some lesser-known and perhaps less significant factors that played into these price trends as well. For example, for one reason or another, the demand for housing increased during the pandemic, leading to a greater demand for building materials, while also at a time of the lowest amount of labor supply in recent years. There were also some complications to the supply chain due to import and export tariffs between the U.S and Canada. This saw, for example, the trading of lumber products become disrupted.
With the combination of a lack of transportation, a lack of materials being manufactured, a demand for new housing, and a lack of materials being traded, it was safe to say that the overall and available supply of these building materials was not very close to meeting its demand. When the supply cannot meet the demand, products become more scarce and prices go up.
Now although it's important to look back and gain at least a basic understanding of why these price trends came to be, it's equally if not more important to look ahead and evaluate the future.
Future Projections
Nobody knows for a fact what's going to happen to the price of building materials in the future. However, expert economists in the construction industry have the knowledge and skillset to make some predictions about where these rates are likely going to go.
First and foremost, statistics show notable improvements to the overall cost of building materials in 2022 so far. Of course, these improvements vary from material to material. For example, the price of hot-rolled steel coil has decreased more than 20% from September 2021 to January 2022. It's also projected that lumber prices will start to settle down a little in the summer of 2022.
With good news, however, comes some not-so-good news. Due to the overall state of both the U.S and Canadian economies, there will likely be some inflationary pressure that continues to affect the price rates of building materials, keeping them higher.
Overall, although there are still most likely going to be some price-rate difficulties to come, there seems to be a bit of hope for the cost of building materials in the near future. With all of this information at hand, it's beneficial to take a look at how exactly these costs are going to affect you.
How The Rising Costs May Affect You
Though construction projects help to create better infrastructure, dream houses, and everything in between, at the end of the day the industry is still concerned with business and profits. The rise in building material costs has had its obvious effects on the industry as a whole, but what does it me for you?
There are several challenges that contractors have had to deal with and will still experience in relation to the rising costs. Although you may have already gone through some of the issues yourself, it's still worth being informed about all of them just in case you have to mitigate another one in the near future.
The first and perhaps most concerning issue that rising costs have spawned is that developers have, and still are, reconsidering projects. Since material costs have become higher than usual, smaller developers don't have the same bargaining power as larger developers when it comes to negotiating material prices. These cost increases are then passed onto the clients and customers, which makes budgeting and turning a profit even harder than before. Without the ability to compete with their much larger competition, smaller developers reconsider even starting projects, which creates less work for contractors.
Another all-too-familiar issue created by the rising cost of building materials is that previously agreed-upon contracts become unprofitable for contractors. Fixed-price contracts that were agreed to before the times of price increases have inevitably left contractors in unwanted and awkward predicaments. With these fixed-price contracts, clients don't want to have to pay more than what was stated in the original contract that they agreed to. However, in a lot of cases, contractors simply couldn't execute a job with this type of contract because it would have left them actually losing money. As mentioned previously, building material price fluctuations are still a very real concern and something to beware of when quoting a project in today's current landscape.
Even if you were a contractor that managed to get a project started, it was more than likely that you experienced project delays due to material shortages. The cost of building materials did rise, but this was partially due to the fact that there were fewer materials for suppliers to sell. That said, project delays due to the unavailability of materials were also a common occurrence. This is still something that should concern contractors in the near future. Although supply chain issues are slowly being resolved, you should still be on the lookout for other external factors that might halt the availability of building materials.
Finally, as a contractor or even a developer, a very unwanted issue that the fluctuating material costs have presented is a supplier's hesitation to lock in prices for longer periods of time. This price-induced uncertainty is something to vigilantly be aware of when determining budgets for projects in the future.
Final Thoughts
If there's one theme that you should take from this blog throughout your everyday operations it's this: You should be routinely monitoring the price trends of building materials and be aware of any external situations that may affect them. By staying ahead of the game, you'll position yourself for success when budgeting and timing projects, thus keeping customers happy and business running as smoothly as possible.
