US Construction Market Report 3Q 2023
Materials, labor and tendering
Materials
Significant materials and products price escalation was seen in 2022, following that which occurred in 2021 as economies reopened after the COVID-19 pandemic. Russia’s invasion of Ukraine reignited cost escalation due to supply chain disruption and soaring energy prices pushing up production costs.
More recently, some products and materials have seen reductions in pricing in response to a weakening global economy and reducing input costs, particularly energy. However, as shown in Figure 7, different commodities see different pricing variations. Some, such as steel mill products, have seen reductions in the three months and year to July 2023, but overall pricing is still significantly higher than pre-pandemic. In the case of steel mill products, prices in July 2023 were 70.5% higher than in February 2020.
Energy’s influence on input costs
Soaring energy pricing in the aftermath of Russia’s invasion of Ukraine heavily impacted materials and product costs and volatility looks set to remain.
Natural gas pricing and demand is unpredictable. In the first half of 2023, the US was the top global liquified natural gas (LNG) exporter, with the UK and Europe the key beneficiaries.
US gas futures increased in September due to a combination of a decline in daily output and forecasts of rising demand due to warmer weather. Impacts have been felt from the Chevron-LNG workers conflict in Australia and an operation challenge at Freeport LNG in Texas.
Oil prices rose above $90 per barrel for the first time in 2023 in early September, as Saudi Arabia and Russia extended their production and export cuts until the end of the year. Initially a temporary measure, one million barrels a day have been cut from the global market since July. The supply reductions likely intend to limit the risk of a worldwide economic slowdown impacting oil pricing.
Increasing energy pricing impacts construction input rates, for instance, higher transport costs.
Build America, Buy America guidelines
The White House has clarified the position on which construction materials for federal infrastructure projects must be produced in the US.
Following the issue of the proposed draft guidance in February, the final guidance defines relevant construction materials and local manufacturing process standards for each material. To qualify, a product must be manufactured in the US, with 55% of the component cost domestically fabricated.
Construction materials for which the guidelines apply include:
- Non-ferrous metals
- Plastic and polymer-based products, including polyvinylchloride, composite building materials and polymers used in fiber-optic cables
- Glass, including optic glass and optical fiber
- Fiber-optic cable, including drop cable
- Lumber
- Engineered wood
- Drywall.
Waivers can be issued by awarding agencies if:
- Applying the principles would be inconsistent with public interest
- Where US-manufactured products are not sufficiently available
- Using US materials would increase the cost of the overall project by more than 25%.
The Associated General Contractors of America expressed concern that the requirements will “severely limit the supply of materials contractors can use and increase the costs of those products as the guidance goes into effect”.
Producer price indices
Producer price indices for different construction sectors show increases in the year to July 2023, indicating the pressures faced. Higher construction costs slow project development.
Whilst cost escalation is not expected to be as great in 2023 as in 2022, forecasts show price increases for some materials and higher input costs continue to squeeze margins.
Materials availability challenges
The Associated General Contractors of America recently said that contractors see relief from supply chain problems and price escalations, but the competitive market means key materials are hard to find. Therefore, mitigation measures should continue to minimize risks to project delivery in the meantime. Measures include accelerated purchases, alternative suppliers, substitutions and stockpiling items. There is also a preference for domestic sourcing and localization to improve supply chain resilience.
With the increase in adverse weather events and impacts from climate change, there is concern that this may cause supply chain disruptions and project delays.
The risk also remains that geopolitical tensions could escalate or develop, further disrupting global energy, logistics and commodities markets relevant to construction.
Impact on bidding and the supply chain
To overcome materials volatility challenges, contractors sometimes submit bids with shorter duration price locks and variable pricing tied to producer price indexes. Subcontractors are also increasingly indexing bids to their material costs to minimize cost risks. Therefore, contracting strategies like price escalation clauses are becoming more common to manage inflation and materials price uncertainty.
Suppliers work with contractors earlier in the design process to stabilize materials availability and pricing. Vendors increasingly require deposits and progress payments throughout projects to ease cash flow risks.
Labor
As mentioned earlier, the labor market remains relatively tight. According to the US Bureau of Labor Statistics, July 2023 saw 363,000 construction job openings.
Labor shortages in construction trades constrain builders' ability to start and complete projects. There is concern that the problem will only worsen as the significant pipeline of infrastructure and energy projects progress, alongside demand from other sectors.
Ultimately, skills shortages will likely impact construction costs and project completion. To try and mitigate the issues, there is increased workforce planning, incentivization and the use of productivity-enhancing technology.
Confidential research and consulting business’ commercial program, various North American locations — Gleeds provided Program Management, Project Management and Cost Management services.
