It is the question everyone is asking in the construction industry right now, “What’s happening with prices, and when will it come back down?” The short answer is, no one can say for certain.
What we do know are a few key principles that can help all of us be more discerning consumers of current information:
- Commodity Prices do not Equal Actual Costs – Many people have taken to following publicly-traded commodity indexes to understand where things are going. While this can give us some insight; many things affect the commodity indexes besides just the actual cost of the materials. For material markets that have been hit extremely hard, turning to trusted suppliers is the only way to know where prices are and what is to come.
- Supply Trumps Demand – In certain markets, such as lumber and PVC, an extreme shortage in supply is driving the price and not the existing demand. The slowdowns in production related to the pandemic, natural disasters such as the storms southeast, and the wildfires in the west, coupled with oversea demand and shortages, have created massive material shortages up the pipeline. As a result, it is not a measure of backlog or sales that informs us of how pricing will change, but instead, we need to look at what’s happening on the supply chain side to anticipate a price drop.
- We Don’t Know What We Don’t Know – There are likely supply-side issues that we haven’t yet uncovered, and while we try to anticipate as many of these as we can, the reality is that it’s unknown where sleeping material issues may lie. During the economic shutdowns that occurred earlier this year, many industries were impacted in ways we haven’t yet seen. Still, construction continued in most states, depleting our inventories and causing these material spikes. The Douglas Company does our best to anticipate these by talking directly with the sub-tier suppliers to our contractors as part of our process. We go to the source to head off any material and lead time issues and trach them using our Material and Equipment Status Report that we update weekly.
- This Will Correct, but Timing is Uncertain – One unfortunate and widely accepted truth is that construction revenue and work put in place will decrease significantly in the months and even years to come. Backlogs are dwindling, and perhaps more importantly, architectural billings are down significantly. This will result in a slowdown that allows the supply side, and therefore pricing, to return to normal. Material costs may also be offset with lower labor costs and markups as those backlogs remain low as they did in the recession last decade, but we have not yet seen this occurring in the marketplace.
- Correction Does Not Mean “Back to Normal” – We have seen many times before, such as the steel price hikes of 2018 due to the concerns around tariffs, where material prices increase but never return to their original prices. This is a likely scenario in many material sectors. Strong partnerships and contractors who can think conceptually about designs that minimize cost will be vital to offsetting these for the long run. It is one of the reasons at The Douglas Company we seek to be involved with the Preconstruction and pre-design planning phases of the project to use our experience to help plan projects from the conceptual design phase to control costs.
The industry stands ready for the stabilization of prices. Unfortunately, the best we can do for now is to remember these fundamentals and stay informed day-to-day as information changes.
Bruce Douglas, PMP, LEED AP BD+C
The Douglas Company
Senior Project Manager