Building Material Price Spikes Threaten Industry Recovery

Published on February 26, 2021 by Nate Bortz

According to a recent survey from the National Association of Home Builders (NAHB), the top two significant problems builders expect to face in 2021 are both building materials related. With most market trends showing that residential building projects and the cost of building materials are still increasing, there are naturally a lot of builders feeling worried about the future.

In this blog, we’ll cover the following:

• The concerning upward trend of building material costs
• What actions national contractor organizations are taking
• What contractors across the country have been doing in response to the pandemic/rising material costs

As you read this blog, we ask that you think about your own experiences from the past year, and what your concerns are for the year ahead. Submit your stories to blog@onlinecti.com and they could be featured in a future follow-up blog!

Rising Building Material Costs

Just last week, the U.S. Bureau of Labor Statistics released their updated Producer Price Index (PPI) that includes January 2021 data. The report shows that over the past year, softwood lumber spiked 73%, iron and steel scrap has surged 50.8% in the last 12 months, including a 25.8% jump from November to December, followed by another 20.6% jump from December to January.

The consequences of these price increases have been far reaching, affecting everything from project bids to other seemingly “unrelated” building materials.

The extreme price increases “are harming contractors on existing projects and making it difficult to bid new work at a profitable level,” said Associated General Contractors of America’s (AGC) chief economist Ken Simonson. “While contractors have kept bids nearly flat until now, project owners and budget officials should anticipate the prospect that contractors will have to pass along their higher costs in upcoming bids.”

Overall, the PPI for cost inputs to new nonresidential construction — what contractors pay to get a job done — jumped 2.5%, while the price contractors say they would charge for specific jobs inched up just 0.2%. That widening spread of costs versus bid prices has alarmed industry watchers such as the AGC so much that CEO Stephen Sandherr sent President Biden a letter last week.

In the letter, Sandherr said AGC believes the White House can play an important role in bringing prices down by urging domestic lumber producers to increase production, and by working with Canada on a new softwood lumber agreement.

As for other materials, Construction Dive reports that costs for drywall, copper, steel studs and even vinyl siding have risen, as well as those for other items that include steel.

“It’s affecting appliances. Steel is in hardware. It’s just in a lot of products on the job,” said Mike Taylor, CEO of a Florida-based general contractor company. “We’re feeling strong price pressure increases pretty much down the line.”

Reasons for the Price Spikes

Because 2020 was a year that almost no one would call “normal,” there are a number of factors that contributed to the price increases. Supply chain issues, wildfires, and lumber tariffs all piled on top of the main reason for the spike.

“The short answer is the pandemic,” said Simonson. “The supply chain is still being affected in a number of ways.” Simonson also noted that the lingering supply chain snafus could affect the anticipated rebound in construction activity in the latter half of 2021, especially in markets where contractors face high material costs, a lack of supply, or both.

Job-Level Coping Tactics

In order to try and stay afloat during the initial waves of stay-at-home orders, contractors and general contracting businesses used some of the following methods:

• “Survival Bidding” – A practice where a contractor bids less than the job would cost them, just to stay in business. Last month, Simonson noted that since April, average bids have only increased 0.1%, while material costs rose 8.1%.
   
• Trying Different Materials – Mike Miner, director of preconstruction at Rockford Construction in Michigan, said they’ve been substituting different materials when possible, like oriented strand board (OSB) instead of plywood, in order to keep their projects on track. “I think a big thing most people underestimate in construction is how nimble we are,” Miner said. “Cost volatility can hamstring projects for a while, but it’s only a matter of time before we find a different solution.”
  
• Lowering Costs By Shortening Bids – Some contractor businesses have relied on building up project backlogs and pushing their employees harder to get projects done faster – which in theory reduces labor costs. 

Looking Ahead

As of now, according to organizations like the AGC, the best chance for possible relief will come from government regulation changes. Whether that means making a new deal with Canada, making it easier for domestic loggers and steel producers to create more materials, or something in between. In the meantime, we want to hear your stories. What actions have you taken to complete projects and keep your business going over this past year? Let us know at blog@onlinecti.com for a chance to be featured in a future blog.