Trying to determine and act on the next construction material that reaches high-scarcity levels is confounding the construction industry, according to a new Construction Outlook report from JLL.
“Volatility around materials is hitting developer’s wallets at a higher rate than initially anticipated earlier this year,” according to the report.
JLL said it expects materials prices overall this year to rise by 18%, up from its 12% forecast made at the start of 2022.
“Delays are pretty much universal at this point,” Andrew Volz, JLL Project and Development Services Americas research lead, said in prepared remarks.
“Developers will need to rework how they traditionally do projects as ‘design, bid, build’ no longer works.”
Volz said that where previously materials purchasing was the last step in the “design, bid, build” process, that order has flipped.
“Project managers are sitting in on the design phase with engineers, and once they have a general idea of spec, they are placing orders for materials,” he said, adding that by the time the design phase is complete, they often are still waiting on those materials ordered six months earlier. “Just getting your hands on stuff is almost more difficult than paying for it,” he says.
Most Work ‘Design, Bid, Build’ Simultaneously
Lisa Tamayo, Vice President of Development at BLT Enterprises, tells GlobeSt.com, “With the recent post-pandemic shifts in regulatory processes, progressively tightening construction and operational constraints, supply chain setbacks, and inflating labor and material costs, navigating the intricacies of the changing development environment is challenging.
“We’ve found that proactively establishing a cohesive, experienced team of development professionals, including designers, architects, contractors, and market researchers is the foundation to successfully accomplishing any large-, or small-scale, build-out project in today’s climate.
“A comprehensive team working in-step can determine the ideal design strategy, account for fluctuating materials costs, and lay out reasonable timelines to execute the project while minimizing costs and maximizing efficiency.”
Tamayo said that hands-on management of the development team, along with forward-looking market analytics and practical budgeting, ensures that realistic expectations are met and communicated across each individual project.
“We can no longer operate in a ‘design, bid, build’ structure as many development professionals have habituated. But rather, the construction process has become more fluid, and requires rigorous management and communication throughout the life of the project.
“These once-linear steps are now approached as a simultaneous process that needs to be well-thought-out yet flexible to pivot depending on availability and cost of materials.”
She said that new deliveries can be expected to come online at a slower pace than previous decades, likely to become the new normal through the next decade.
Logistic Mismanagement Being Rewarded, ‘Unfortunately’
Trac Bledsoe, the custom development lead at The Practice Companies, tells GlobeSt.com that the significant impact of rising costs on new projects cannot be overstated.
“Projects underway late in 2021 and into 2022 have been unable to adjust in a manner adequate to solve for a 25% to 30% or more price increase — projects were fully designed and often permitted by the time construction cost challenges were identified.
“Projects going forward have limited options outside of stopping or reducing scope as many of the drivers of the cost escalation are fundamental components, such as roofing, mechanical units, transformers, etc.
“Logistic mismanagement in the manufacturing sector by suppliers is, unfortunately, being rewarded in the current market with increased pricing and higher margins which adversely affect our healthcare providers and the overall market.”
Contractor Pricing Adjusted Every 30 Days
Rod Lockard, Director of Construction, DXD Capital, tells GlobeSt.com that contractor pricing is now adjusted every 30 days with final pricing based on the date of delivery instead of offering guaranteed maximum pricing contracts.
DXD Capital has exercised a couple of creative solutions to mitigate rising material costs, Lockard said.
The first is negotiating with vendors to deliver higher upfront deposits in exchange for a capped price.
“Getting more money in the hands of our vendors initially has helped them agree to pricing free from last-minute price hikes,” he said.
A second strategy that has allowed DXD to alleviate increasing steel prices was to buy the steel needed for a project in bulk ahead of schedule.
“A project’s steel is currently stored in a yard about one mile from the construction site,” Lockard said.
“While the yard rental represents a cost, it is estimated to be 1/10th of what the price might have been to have it delivered when it will be needed this coming fall.”
Some Bids Valid for Only 48 Hours
Steve Hardy, principal at Gaspee Companies, tells GlobeSt.com that rising costs coupled with labor shortages makes underwriting a redevelopment more and more challenging.
“When seeking estimates or bid prices, some subcontractors are offering up bids for work that may only be good for 48 hours,” Hardy said. “These conditions also make it hard to negotiate long term leases with tenants who have specific build out and TI packages tied to those leases.”
Be Ready for Last-Minute Changes
Steve Sommer, executive general manager and president of New York Construction at Lendlease, tells GlobeSt.com that over the past year, building material shortages have extended supply chain horizons twofold, or more, depending on the material sought to procure.
“This creates pressure to secure materials as soon as possible to avoid unnecessary delays and future price volatility,” Sommer said, “because external factors can impact the cost and timeline of a project so dramatically, it’s a tremendous benefit when the ownership, design and construction teams are able to communicate early on, as it expedites decision-making and improves communication as the project progresses, which is helpful if any last-minute changes need to be made.”
Ask Subcontractors What Materials are Susceptible
Tom Prasky, head of construction, Americas, at Unispace, tells GlobeSt.com, that according to a recent analysis by Unispace, the average cost of construction inputs has risen 14.5% over the last 12 months.
“Engage subcontractors early to identify materials which may be susceptible to supply chain issues,” Prasky said. “Come up with comparable products/ materials that are locally available and less susceptible to pricing volatility.”
Maximize Onsite Storage Space
Justin Pelsinger, COO, Charney Companies in New York City, tells GlobeSt.com that, due to the rising cost of construction, his firm has been putting deposits down on construction materials much earlier in the procurement process than previously to lock in agreed upon pricing.
“Additionally, rather than wait for deliveries, we have opted to maximize storage space on site and accept materials as early as possible so that we don’t get hit with any transit related delays or increased pricing.”
A Bigger Strain on Smaller Contractors
Erin Sykes, real estate advisor, NS chief economist, LEED AP, tells GlobeSt.com that this issue is affecting smaller contractors more than larger ones.
“Larger construction companies have the capital to purchase and warehouse materials for upcoming projects versus their smaller counterparts that are only able to purchase the materials specific to an upcoming job,” Sykes said. “This will further split the industry and makes it almost impossible for younger organizations to gain market share.”