China is the world’s largest supplier of construction materials. While the economic giant is beginning to recover from the coronavirus outbreak, the effects on the construction supply chain is only beginning to become apparent. One of the unseen effects is the potential shortage of construction materials. How is the coronavirus affecting the construction supply chain today? And how will it affect the availability – and cost – of materials in the months to come?
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Coronavirus in construction
The number of cases of the coronavirus increases every day, as does the number of businesses affected by the virus. States continue to shut down gatherings and urge businesses to close or stagger shifts. The construction industry is bracing for significant coronavirus impact. Some cities are already shutting down construction projects in the hopes of preventing the spread of the virus.
Contractors and suppliers are rushing to limit the financial fallout from COVID-19. (Learn more about specific steps construction businesses can take to survive the coronavirus.)
But the supply chain is another story; material shipments arrive on a slow-moving ship (literally!). Most projects underway in the US likely had their construction supply orders in transit weeks, if not months ago. While some projects have started to feel the effects, others are only beginning to feel the first breeze of a coronavirus blowback.
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Today: How the coronavirus is affecting the supply chain
The effects of the coronavirus on the construction industry varies from state to state, as states are making recommendations based on the number of cases in their state. This makes tracking the combined effects to the industry even more difficult.
Many of the basic construction materials we rely on come from China, including steel, millwork, plumbing and electrical fixtures, concrete boards, and flooring tiles. So far, some haven’t felt the pain of a sick supply chain. A senior director in CBRE’s construction cost consultancy, Chris Smith said “We’re not really experiencing a major negative impact from Coronavirus yet. Most of the raw materials and the products we use in construction are in stock and already in shipment from China.”
Mandi Kime, Director of Safety at AGC of Washington, also said they haven’t had any reports of any supply chain issues.
However, that isn’t the story some are telling. Two large-scale solar power projects in Wisconsin have had to declare ‘force majeure’ and delay their projects’ completion. Solar cells and panels, inverters, racking system components, and about 80% of the specialty glass used to manufacture solar panels comes from China. This shutdown could have a tremendous effect on the solar power industry in the coming months.
The only thing that is clear is that although we may not be seeing immediate effects from the pandemic, we will be seeing some changes in the months to come. With manufacturing facilities shut down in China and Italy, it is going to take some time for the backlog of orders to be processed and shipped out.
The next question we want answered is “How long will it take?”
Future: What the supply chain looks like after COVID-19
It is important to note that the duration of the shut-down is going to have a big impact on the effect in the construction industry. A two-week work stoppage vs a six-month work stoppage is going to make a difference in how much material flow is interrupted. It will be much more difficult to come back from a longer shutdown.
Price increases in material supply
Construction companies can expect to see price increases coming in the wake of more demand for material with less supply to go around. Shlomi Ronen, principal of Los Angeles-based Dekel Capital, said his firm, which focuses on projects on the West Coast, is watching for price increases closely. “That’s definitely the potential,” he said. “As things become scarce, all of a sudden [prices] begin to move.”
Materials harder to come by
Other materials, such as stone sourced in Italy, may just become harder and harder to get. Project owners may want to start looking at alternative materials now, before pricing goes up too much. Contractors and owners will need to negotiate any price increases to make sure no one bears too much of the burden.
How contractors can deal with supply chain interruptions
What can your company do if you are facing material shortages or increased pricing due to scarcity? Starting early is the best move you can make. The sooner you act, the less of an impact it will have on your projects.
Find alternative material sources
One thing you can do is look for other sources for your materials. Don’t just look at the US. Materials manufactured in America are often much more expensive than those produced overseas, making them too costly for many low-bid projects. Neighboring countries might be the best bet, as they aren’t as affected as countries in Asia (yet).
It isn’t too early to start including alternative sources in your bids. Be sure to clearly spell out the potential for delay when using “traditional” materials and the time savings and additional costs for alternative sourcing.
Adjust your contracts
For current projects, begin talking about potential price increases and delays now. Check with all your subcontractors and suppliers and see if there are any potential problem areas. Communicate clearly with the owner on what the potential impacts might be and see if you can work together to minimize the effects as much as possible.
For future projects, contractors should consider including an escalation clause in their contracts so they’re not left holding the bag if prices suddenly spike. And contracts should include a force majeure clause that spells out specific acceptable delays – and remedies for them.
Reschedule your projects
Another alternative is to reschedule projects until supplies may be more readily available. No one knows exactly how long the shutdown will last, and if it will get better or worse, so this could be a gamble.
However, delaying a project six months to a year, if possible, may help mitigate the immediate problems, and can help the project team plan as more information becomes available.
Planning ahead never starts too early
In an industry that is built on planning ahead, this isn’t something that most people foresaw. Construction companies can use this experience to build a plan for similar emergencies in the future. It certainly has been a learning experience for everyone. Today, you can begin searching for alternative sources, communicate your fears (and potential solutions) to the project owner, and begin working together to mitigate the cost risk.