The construction market is insane.  I hear it over and over.  Escalation is calamitous.  We can’t get materials.  There’s a war for labor. Construction costs are rising.

Why?

There are obvious reasons of course.  The COVID-19 pandemic is ongoing.  The war in Ukraine has restricted a significant portion of the world’s food supply.  But the fundamental issues at hand are not new. We’ve seen price esclations like this before and we’ll see them again. But hopefully I can shed some light on these factors and we can all make better sense of why we’re seeing this now.

The global pandemic

I know this sounds obvious. The pandemic has caused so much disruption to the global supply chain because transportation is harder. China is the primary hub through which most of our goods pass, both raw materials and manufactured goods. China also leads the way in most other shipping essential areas. Chinese authorities don’t hesitate to close ports when an outbreak starts. Construction projects throughout the United States rely heavily on imports from China. Even short delays ripple through the economy and cause cost to rise and schedules to extend.

War

The conflict in Ukraine has demonstrated that war can have global impacts on construction. Construction projects in the immediate conflict zone have stopped. Shipping lanes are disrupted or shut down. And finally raw materials from those areas are cut off from the world’s supply. Ukraine is in the top 5 global exporters of iron and steel creating downstream impacts.

Good ‘ole supply and demand

The fundamental issue at hand is that there is more demand for construciton projects than our industry can supply. Prices only go in one diretion in that environment. Our society’s need to have schools, hospitals, police stations and office buildings has not declined. A good arguement can be made that demand has actually increased. Restricted supply of material and labor means costs escalate.

Skilled labor is hard to find

Skilled construction labor can take up to 6 years to properly train. The high demand of projects will likely produce a more skilled labor, but that will take time. Right now most construction personel have their pick of multiple projects at any given time. Good workers usually lean to the projects that pay the most.

Time

The biggest factor that will destroy a construction budget quickly is time. Construction delays lead to additional time spent on a project and effectively cost everyone money. The Contractor hs to spend to keep people on site to finish. The Owner has to pay in the form of opportunity cost or lost revenue streams. The Owner may have to pay again in actual dollars for changes. Construction schedules are under assault right now as I described above.

What we can expect

I can’t predict the future. I will go out on the tiniest of limbs and suggest we can all see a cooling of rising costs. The fed is raising interest rates to try and dampen overall spending. Also the gap skilled labor needs to be addressed. More women and immigrants could help. Finally we can look to additional on-shoring of critical system components to help reduce transit times. None of these will happen overnight but I’m confident the acceleration of prices will start to slow.