The past few years have been a whirlwind for the construction industry. Two years ago, the Associated General Contractors of America’s annual convention coincided with the official beginning of an unprecedented pandemic. Since then, contractors have been on an economic rollercoaster, marked by major challenges to keep projects going as well as historic infrastructure funding to give promise to new projects. Contractors have had to adapt to steep increases to the cost of materials compounding an already fragile supply chain. The Federal Reserve recently announced its first rate increase since 2018 as inflation reaches its highest level since 1982. Meanwhile, the average hourly earnings for production and nonsupervisory workers or employees in construction rose 6% year over year in February, the largest year-over-year increase since late 1982.
All of that leaves contractors with many questions about the economic and legal landscape for the industry. SmartBrief recently spoke with Ken Simonson, chief economist at AGC, and Brian Perlberg, the association’s senior counsel of construction law and contracts, to get a sense of what lies ahead for contractors as they gear up for AGC’s convention next week in Grapevine, Texas. Here are four takeaways:
1) The Russia/Ukraine conflict will create challenges, but contractors can handle it
Russia’s invasion of Ukraine has had an immediate influence on the costs of petroleum products, including the diesel fuel that is very important to contractors. An embargo on Russian fuels could force prices even higher. But Simonson doesn’t believe that alone is enough to derail any construction projects in the US. He notes that this recent spike is not the only price increase contractors have had to overcome, and that “for gasoline, in some ways, this is actually catch up.” However, he believes it may take a while to sort out how the war affects the prices of other materials.
“I think we’re pretty well sheltered at this point from the reduction in industrial activity or of accessibility to materials coming in and out of Russia and Ukraine,” Simonson said. “And again, there may be this offsetting effect, the extent that the war reduces economic activity elsewhere, particularly in Europe, that might free up the supply of certain metals or materials.”
On the risk side of things, Perlberg says there’s no “silver bullet” to insulate contracts, but contractors have a number of tools at their disposal, namely price escalation clauses. He adds that contractors are also looking at early procurement of materials and, in some cases, “warehousing” them. Contractors need to be flexible during these trying times, and a key ingredient to ensuring contractual resilience is consistent communication.
“The one thing that everybody recommends is really communicating up and down the contractual chain with your suppliers, with your owners, your clients, with your subcontractors so there are no surprises and you can try to fill in the gaps and make changes,” Perlberg says.
2) Warehouses and manufacturing are among the hottest construction markets
Two years ago, Simonson was bullish on the health care and warehouse construction markets. While health care construction hasn’t quite picked up as expected, the warehouse construction “just seems unlimited,” he says.
“We seem to be getting ever bigger and denser warehouses as more automation takes place,” he said. “And then we’re getting more local distribution centers or hybrid centers, like the grocery store near me that closed down and then reopened as an Amazon Fresh store that has less selection for people going through the aisles, but it has a big pickup area or for either shoppers who’ve ordered online and are getting it, or for their preferred delivery service to pick it up.”
Simonson also sees a strong market for data center construction as nonfungible tokens and various forms of cryptocurrency gain in popularity and require a lot of computing power. However, Simonson’s “number one” area for construction this year is manufacturing, with tens of billions of dollars being poured into the semiconductor market. Furthermore, the US will need to add lots of manufacturing capacity for the transition to renewable energy. There also may be increased demand for manufacturing vaccines and other medical products.
3) Infrastructure funds will take time to distribute
The infusion of money under the Infrastructure Investment and Jobs Act created a lot of excitement in the construction industry, but the delay it took to pass a full-year appropriations bill made construction and engineering groups uneasy. However, Simonson says he always expected that it would take considerable time to turn that money into actual contract awards and then into selection of contractors. As a result, the expected adverse effects on materials and labor for those projects could be muted in the medium term.
“It’s hard to call it fortunate, but in terms of time of year, there’s probably less lost by putting this off from October 1st to say, April 1st, then if the money had waited into the heavy building season,” he said. “I think it really depends how ready the federal agencies and the corresponding state or local agencies are to act once they do get the green light to push this money out the door.”
4) The pandemic is not an “unforeseeable” risk in contracts anymore
Perlberg noted that the onset of the coronavirus and subsequent price escalation spikes were devastating from a business sense because they were unforeseen. There was a significant uptick in interest in force majeure clauses in contracts to account for unforeseen events, but two years in, many of the things that were unpredictable no longer are, Perlberg says. He believes force majeure is an “inadequate solution” because the clause generally provides contractors with greater time for projects as opposed to money.
One of the ways contractors can get ahead of supply chain issues is to build innovation into the contract development process. Contractors that use prefabrication to expedite projects and use artificial intelligence to evaluate contract risk are well-positioned to mitigate risk.
“I do feel like we’ve hit a tipping point where the benefits of these technologies are proven, and these trends are proven, and they’re needed that it’s going to separate those contracts to adopt and adapt these techniques and those who are left behind,” Perlberg said.
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