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Supply chain problems plague construction firms

new home under construction

Construction and building materials are in short supply and have seen double-digit price spikes since the COVID-19 pandemic took hold last year, driving up project and rebuilding costs and affecting companies ranging from contractors to insurers. 

Natural disasters, manufacturing and production setbacks, logistical bottlenecks, labor shortages and political instability have conspired to produce what several sources call a “perfect storm” of cost overruns, delays and frustration. 

“Material cost inflation isn’t driven by any one event; it’s driven by all the events happening everywhere,” said Anthony Hanson, Boston-based director of analytics for AIR Worldwide, a unit of Verisk Analytics Inc.

Hurricanes Michael in 2018 and Ida earlier this year destroyed timberland, and Ida also took down the electrical grid for the Texas petrochemical complex, a key provider of construction input materials, said Jon Tate, vice president for construction in Atlanta for Zurich North America.

While construction did pause at the beginning of the COVID-19 lockdowns, it was soon back up and running as an essential industry, Mr. Tate said. Many companies in the construction materials supply chain, however, remained shuttered, because they were either deemed nonessential or as the result of other restrictions. Construction activities, therefore, have been pulling on a supply chain that has been largely idle, depleting stock.

Jim Gloriod, St. Louis-based CEO of Aon Construction Services Group U.S., a division of Aon PLC, said increased prices for lumber and especially steel have continued to drive up input costs. In addition to construction materials, steel is also used for appliances, which can be in short supply for large residential projects.

Mr. Gloriod also pointed to the impact of overseas manufacturing of components. “There are literally shortages because of some of the challenges around overseas manufacturing, as well as transportation and supply chains.” 

The effects of tariffs instituted during the Trump administration also continue to plague markets. “Certainly, tariffs have put pressure on pricing and supply as well,” Mr. Tate said. 

Inflation and economic policy are also affecting the sector. “There’s some inflation and there’s likely to be some more inflation on everybody’s radar,” said Cheri Hanes, a construction risk engineer in Dallas with Axa Construction, which is part of Axa XL, a unit of Axa SA.

“The low finance rates we have right now and have enjoyed for quite some time — there are political reasons to think they might increase,” Ms. Hanes said, which could spur more construction activity before rates rise.

The shortages have led to some construction companies moving supplies to different sites to avoid work delays and some to hoard materials to avoid shortages, sources say. 

“They’re hoarding materials instead of relying on just-in-time delivery. Job sites I go to are packed with materials procured proactively because they just don’t know what’s going to happen next,” one source said.

Such storing of materials can raise safety concerns, and carrying inventory increases costs, sources agree.

Ms. Hanes said that demand for construction materials has increased as businesses have been changing their office concepts and in some cases moving to new locations. “There’s a lot of construction associated with that,” she said.

Occurrences as disparate as an upswing in home improvement projects during pandemic lockdowns to a coup in the African nation of Guinea — the world’s second leading supplier of bauxite, a key input for aluminum — have strained supply chains.

The confluence of events has wrought havoc on building materials pricing and availability, resulting in an average 26% increase in input costs on construction projects so far this year.

Among the worst price hikes, wood is up 101% year-over-year, while steel prices have increased 88%, copper is up 61% and aluminum is up 33%, according to figures from the 2021 Construction Inflation Alert from the Associated General Contractors of America. The price of some individual commodities, such as timber, have moderated from month to month, but futures contracts for materials show no long-term relief. 

AIR’s Mr. Hanson said that actions by traders and speculators have contributed to pricing spikes and volatility.

Material shortages and unreliable deliveries can extend business interruption claims because it can take longer to make repairs, said Jill Dalton, New York-based managing director of Aon’s U.S. property risk consulting group, who handles property claims for large commercial policyholders.

COVID-19-related restrictions can also complicate the measurement of business interruption claims, which are generally based on some baseline of historical business activity.

If that baseline has been altered by COVID 19-related restrictions, such as lockdowns, business interruption claims can be more difficult to calculate and require more documentation and time. “COVID has made that more challenging, because you don’t have the historic results to look at,” Ms. Dalton said.

In some cases, elevated repair costs can leave a policyholder underinsured, she said. 

Twane Duckworth, managing director and risk manager for the city of Garland, Texas, and a member of the board of directors of the Risk & Insurance Management Society Inc., said pricing fluctuations and construction delays can affect schedules of insurable structures.

A construction project may be slated to come off the city’s builders risk policy and onto its inventory of insured structures at $1 million, but the value may rise to $1.5 million due to delays and cost overruns, which could have coverage implications, Mr. Duckworth said. 

In addition, it may be prudent for policyholders to more frequently inventory their insured structures and assess whether replacement values may have changed due to market fluctuations in building material costs, he said. 

“Risk professionals should remain aware of how routinely they appraise and evaluate the values associated with their inventory, particularly in a market like this when it can change so rapidly,” Mr. Duckworth said. 

The pandemic likely exacerbated supply chain and market problems.

“COVID-19 caused people to change their behavior and that translates to how they operate in the marketplace, so I see it as an economic disruption because people are doing things differently,” AIR’s Mr. Hanson said. 

“The COVID impact was to take a bad situation and make it worse,” said Mr. Tate of Zurich.

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