Dealing With Material Shortages & Price Increases

Supply chain restrictions and material/labor shortages have added an element of delay that requires contractors to navigate these issues to minimize impact on the current project duration and budget.  While there is no blanket road map for negotiating resolution of these or similar unforeseen impacts, by implementing best practices of construction management, contractors and project managers can put themselves and their work in better position to mitigate the effects and achieve more successful results. 

1. Assemble the team early.

Combining project teams sooner rather than later can significantly increase speed-to-revenue. When architects and contractors collaborate early in the process, either in a design-build or design-assist delivery method, schedules can proceed more quickly, and expensive, time-consuming redesigns can be avoided. For example: in a ground-up project, a smart design choice regarding the location of the major vertical circulation (i.e., stairs and elevators) can result in significant cost savings.

2. Update and Revaluate Work Plan and Project Schedule

Construction plans and progress should evolve throughout the performance of the work and be regularly revaluated to ensure work can continue to stay on track as closely as possible.  Assuming that impacts will stay consistent through an ongoing event is setting a project up for greater difficulties in later phases.  
3. Amend budgets.
Historically, material cost increases have slightly exceeded the rate of general inflation (3-5%); in the current environment, owners and developers should consider escalation contingencies of 10-15% per year. Predicting exactly when material prices will stabilize is impossible, but establishing strategic budget reserves, contingencies, and reinvestment plans can help owners and developers manage risk.
4. Explore alternative or unconventional materials.
Expanding material options for every component of a building, from the foundation and superstructure to the various systems and interior building materials, can help control costs. Pre-cast concrete, ready-mix concrete, DensGlass, zip-board, and alternative wood species can all be useful substitutes for materials that are over budget or difficult to procure. For wood-framed projects, prefabricated wall panels and framing systems can limit material waste, decrease labor costs, and potentially expedite project schedules.
5. Procure materials well in advance.
In addition to exploring alternative materials, procure materials in advance whenever possible to mitigate risks around pricing and availability. Buying materials earlier typically results in cost savings and greater decision-making power about other factors later in the project. Eventhough there is usually a greater cash outlay initially, it mitigates unknown exposure to shortages and can ensure access to materials when needed. Some owners and developers have made the decision to purchase materials directly, believing it will avoid markup costs. But going that route also eliminates a variety of services and introduces a higher level of risk, so it’s not something to undertake without examining the full picture.
6. Manage contracts and partner with contractors.
Developers and owners should be mindful of how material price volatility can affect both new and existing agreements, and fully understanding your material cost & escalation clauses is critical. Often, force majeure clauses will be modified to allow for recovery of costs (not just time extensions) for catastrophic events, which can lead to cost escalation. Developers should also avoid contracts with open-ended allowances for material costs. In the current environment, partnering with contractors and suppliers to set an indexed price point with a cap, with an agreement to share in the savings or overages up to the cap, is a more appropriate approach to mitigating risk. This approach also allows for owner participation in any upside as prices stabilize.