Demand VS Supply in the Construction Industry

The current state of the construction industry is one of challenge. Contractors are in incredibly high demand for renovations, new home builds, and other projects. They’re poised for serious growth, except for one thing: There aren’t any affordable materials.

 

Demand VS Supply: What happened?

The pandemic caused a wild amount of demand for contractors and a shortage of materials. In the past, whenever either condition existed, it has pushed the price of building up. In today’s construction industry, it’s pricing both contractors and prospective project owners past their affordability breaking point.

Contractors are in High Demand

Contractors are in such demand because people want change. With so many folks leaving large cities for greener spaces, or so many working from home and needing a new environment to look at, contractors can’t answer the phone fast enough. These customers want to build new homes, renovate fixer-uppers they purchased in the country, or simply spruce things up a bit. And most of them want to hire a contractor to do it for them (keep “most” in mind).

Building Materials are in Short Supply

But, with materials manufacturing taking a massive hit during the pandemic, there just aren’t enough affordable materials around. With government imparted shutdowns, social distancing requirements, and a general lack of staffing across all industries, the amount of lumber hitting the shelves isn’t what it used to be. And, for the contractors that are able to find materials, they’re extremely expensive.

Workforce Shortages

For materials that aren’t necessarily in short supply, such as stone in the domestic mountain used for building products, or materials waiting at sea to be unloaded, the issue is a workforce shortage. With so many people choosing to remain out of work, material production can’t ramp up. And, there’s a lack of qualified truck drivers to move the materials that are produced. 

DIYers Played a Part

Consider this interesting point: DIYers caused some of these headaches as well. With so many people staying home instead of taking expensive vacations, many decided to tackle renovations and fixer-upper projects on their own. They headed down to the local home center or lumber yard and strapped studs and joists to the roof of the family sedan. This one group may have been responsible for the apparent disappearance of pressure-treated lumber in 2020, as new deck builds are a favorite of DIYers.

Governmental Impacts

Let’s not discount the effect that the government has had on the situation. The Biden administration imparted an 18% tax increase on softwood lumber coming into the US from Canada. Also, tariffs on concrete shipments from Japan are making a challenging scenario even worse. 

Issues for the Construction Industry

This chain of uncanny events is doing one thing: Making construction of any sort more and more expensive. Materials that were once affordable and readily available are typically neither anymore. 

 

• When it comes to wood, the cost of 1,000 board feet of lumber nearly quadrupled over the course of the pandemic. It’s since dropped, but it’s far above pre-pandemic pricing.
• The availability of concrete hasn’t changed much, but the demand and suppliers’ ability to move it to the job site has: There are fewer qualified drivers yet more places to deliver it to, causing a rise in price.
• The cost of steel has been steadily increasing, forcing the price of fabrication and commercial construction to increase accordingly. Some estimates have the increase of steel mill prices as high as 141%. 

 

How To Overcome (or Avoid) These Issues Moving Forward

For many contractors, the time or ability to avoid the supply chain issues caused by the pandemic has passed. However, there are some ways they can avoid the impact these issues can have on their bottom line. 

Job Forecasting

One way to plan for current expenses is to use effective job forecasting methods. By utilizing data compiled from past projects, contractors are able to predict how much a project will cost. While spikes in materials costs do minimize this methods’ effectiveness, the longer the heightened costs occur, the more accurate forecasting will be.

This method requires more than just reviewing old invoices. Utilizing software designed specifically for contractors allows for in-depth analysis of spending, materials costs, labor, and other costs associated with certain projects. The more data collected, the more accurate the report.

Establishing Credit with Multiple Materials Suppliers

A more effective way to mitigate the impact of skyrocketing materials pricing in establishing lines of credit with several suppliers. Many contractors prefer to work with a select few suppliers, but this limits their ability to shop prices and material availability. What the supplier has is what the contractor gets.

While it’s true that many suppliers work off the same supply chain, everyone has a trick or two up their sleeve. Consider a contractor who ordered materials but the job fell through. Potentially, those materials are sitting in one particular yard, which means only one supplier will have access. If a contractor who needs those materials doesn’t regularly deal with that supplier, they may never locate those materials. 

That’s a specific instance, but one that isn’t uncommon. Access to materials often depends on who a contractor knows, which can make establishing accounts with several companies critical. For contractors that worry too many accounts will make accounts payable a nightmare, a solid construction software solution can automate and streamline payments.

Contract Clauses

While no contractor wants to adjust the terms of their contract or back out on a deal, it’s sometimes necessary. Including clauses in a contract that put the onus on the customer might be the best way to protect their bottom line.

For instance, such a clause might state that once a material increases over a certain percentage (which must be established in the contract), the customer will be expected to pay the additional costs. The customer then has the opportunity to sign or pass on the contract. If they sign, the contractor has some reassurance that price increases won’t derail their project or their company’s profit margin.

Hard Times Call for Smarter Measures

Things are tough right now. Though contractors might not be able to take full advantage of the demand for their services, with a few smart moves, they can still grow. The cost of materials may never reach pre-pandemic prices again, but contractors that analyze their established data, diversify their supply chain, and create safer contracts have a better chance of making it through the worst of it. When materials do begin to drop again, they’ll be in the position to fake full advantage and grow. 

Check out Premier Construction Software to see if it fits your company’s strategies and goals.  Our construction management and accounting software provide teams with the tools they need to take advantage of these technologies. Schedule a demo by contacting us today.

We’re more than just construction financial software. We’re built to help your business.

Author Biography:

Tom Scalisi has over 15 years of experience working in the trades. Since moving to full-time freelance writing, he has developed a passion for helping construction companies grow. He enjoys teaching contractors how technology can streamline their businesses and educating them about their rights during payment disputes.