With COVID-19’s delta variant entering the scene and occupying our minds, it seems we're not entirely in the clear. The pandemics overstayed welcome has hit our industry hard, creating challenges in health, safety, and wild demand shifts.
COVID’s effects on the global supply chain have been especially challenging. Every CFMA member has a story to tell about projects going sideways due to key materials not being available or being twice as expensive as planned.
Diagnosing the problem
The supply chain crisis is an enormously layered and complex problem. Untangling the root causes of supply shortages won’t happen overnight, even if COVID-19 vanishes tomorrow. These components of the crisis explain why:
· Global demand is through the roof. The pandemic has shifted demand from services to goods, including new homes and major home renovations. But that shift took place in the context of preexisting rising demand in major economies like China, where breakneck construction is soaking up a significant portion of global supply.
· Containers are in short supply. Manufacturers of shipping containers curtailed production in response to a dip in trade in 2019. That policy continued in early 2020, and we’re still seeing the consequences today.
· Backlogs at the ports. Port infrastructure has not kept up with the shipping industry’s move toward bigger ships. Loading and unloading times have increased, which has created bottlenecks throughout the supply chain.
· Labor shortages. Few businesses have escaped the labor crunch, and the logistics industry is no exception. Truck drivers are in short supply, impacting distribution from those backed-up ports and further squeezing local supply. The shortage of labor has numerous sources, with relatively high unemployment benefits among them. Other causes include high childcare costs, the high cost of commuting, and shifting populations.
These global trends feed into the local conditions that matter most for each project in the construction industry. As financial professionals, our challenge is to proactively anticipate how these headwinds will impact our businesses proactively. The devil is often in the details. As members of the CFMA, we can put our heads together to find solutions to important concerns, like inflation.
Give extra attention to inflation
Inflation is difficult to measure in real-time, at least at the macroeconomic level. Reliably predicting its course is even more of a challenge, especially with so many mixed messages out there. In May, this editorial in Forbes compared inflation concerns to “that smoke detector that goes off every time you burn the toast.” In contrast, a more recent article from Bloomberg points out that economists keep raising their forecasts of the consumer price index.
Since the start of the pandemic, contractors of every kind have been hearing inflation alarms—and not just from a little burnt toast. The global logistics crisis has coupled with soaring consumer demand worldwide to put a serious pinch in the supply of essential building supplies. As anyone who didn’t sleep through Econ 101 can tell you, a dwindling supply means higher prices.
Sticker shock impacts certain materials more than others, with lumber and plywood especially victimized. The prices of steel and copper have also shot up. Major disasters like Hurricane Ida could drive up these costs even more.
In this context, the gap between the bid price and the actual cost to construct will wipe out the profitability of many projects. Businesses with direct exposure to this problem need strategies to maintain solvency. Downstream consequences, like slow payments to subcontractors, may follow.
Inflation needs to be a part of the planning process for project bids and overall corporate budgeting for 2022. In a typical year, one or two percent inflation allowances might be acceptable, but an extra bump might be essential short term. Similarly, pay attention to how rising costs are affecting your business partners. Frank conversations can strengthen relationships that might otherwise flounder when the going gets tough.
Another important consideration is how inflation may be affecting your employees. Rising consumer prices mean real wages are declining. If your business is struggling to find qualified employees—most are—it may be time to raise wages.
We’re all in this together
CFMA members have a key advantage: a strong network of like-minded professionals who are facing similar challenges. By putting our heads together, we can discover strategies to blunt the edge of the supply chain crisis.
How is your business tackling price increases and other logistics problems? Join the conversation in the member forum or on LinkedIn. We look forward to seeing you there.