Three steps to combat volatile building material prices and supply chain shortages

The combination of very accommodative fiscal and monetary policy has supported high savings rates — as well as surprisingly high consumption among U.S. consumers during the pandemic.

Demand has been driven by excess liquidity in the system. From March 2020 to March 2021, M1 money supply — which refers to the total volume of money held by the public at a particular point in time and usually includes currency in circulation plus demand deposits — increased 38.4% across the world's developed nations and 72.1% in the United States.

This means there's a lot of cash chasing a finite amount of goods, and the amount of goods available is being constrained by low inventories and supply chain issues.

Below, learn about the impacts of 2021 volatility as well as how to mitigate the uncertainty caused by supply chain shortages and pricing irregularities.

2021 economic trends

Much of the macroeconomic enthusiasm investors were gearing up for in the first quarter became reality in April of 2021.

• U.S. gross domestic product (GDP) expanded by 6.4%
• Retail sales were up 9.8%
• The Institute for Supply Management (ISM) manufacturing index was at 64.7
• Housing starts were up 19.4%

These increases all reflect the best readings in decades. This huge surge in demand, which is outpacing supply, has driven prices up across the board.

Global supply shortages

Global shortages of many goods reflect the disruption of the pandemic combined with decades of companies limiting their inventories.

Just-in-time manufacturing strategy

Over the last half-century, just-in-time manufacturing has captivated global business. This strategy aligns raw-material orders from suppliers directly with production schedules, allowing manufacturers of all kinds to stay nimble and adapt to changing market demands.

Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.

This method requires producers to forecast demand accurately. However, the tumultuous events of the past year challenged the merits of keeping inventories so lean, leaving supply chains vulnerable to disruption.

In addition to the above issues, tariffs, existing labor and housing shortages are also impacting the construction industry. So, while the economy works through the supply pains of turning the economy back on with booming demand, costs will likely be uncertain.

Steps to mitigate economic uncertainty

There are several steps your company can take to navigate the unknowns of the current economic and supply chain environment.

1. Rely on cash flow projections and contract negotiation

With the cost of construction materials creating short-term and long-term uncertainties in the construction industry, understanding your company’s cash flows is critical to effectively managing these challenging times.

Understanding cash flows at a company and job level is essential, especially when managing a project through uncertainty and increases in construction material costs.

Knowing the answers to the following questions can help you plan and mitigate potential impacts from the cost increases.

• Are you monitoring cash flows at a job level?
• Are you actively following up on jobs with underbilling to determine the reason for the underbilling?
• Are you structuring your contracts and schedules of values in a way that allows for billing costs as early as possible?
• Are there unprocessed or pending change orders preventing billing for all costs incurred?
• Does your contract allow for alternative materials that may provide cost savings for the owner and the contractor?
• If needed, do you have access to a line of credit or other financing sources to weather the storm created by rising material costs?

2. Understand your contract and contractual rights

Understanding your contractual rights is key to securing payment for unplanned costs. Is your contract a fixed price, or does the contract structure allow for more flexibility in dealing with price increases? No matter the contract, it’s critical to apply these best practices:

• Negotiations. Start negotiations for pricing changes early on, before you’ve committed to and incurred costs.