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All things being equal, the supply-chain problems that seem to be touching every sector, industry and sphere of life in the United States could ease up later this year. If the economy works the way it usually does, the production of goods and materials will ramp up in response to higher prices and alleviate the current logjam.

Unfortunately, two years into an ever-mutating pandemic, all things aren’t equal.

Which is why economist Anirban Basu predicts that supply-chain disruptions—not to mention inflation—will continue through much of 2022. “We’re still seeing shutdowns in various parts of the world because of the spread of COVID-19, most importantly in China,” says Basu, chair and CEO of Sage Policy Group and chief economist for Associated Builders and Contractors. “The country is home to a quarter of global manufacturing, so Chinese manufacturing activity has a disproportionate impact on production.”

Even if the omicron variant diminishes quickly and manufacturing regains steam by mid-2022, as expected, the backlog of orders is so great that contractors will still have to wait for materials. “Because of that,” Basu says, “contractors will confront elevated input prices over the near term.”

While it’s no longer news that construction companies can’t count on materials to be available when or at the cost they’re needed, it might be surprising to realize that the pandemic didn’t cause this entire situation. Shutdowns in upstream manufacturing facilities were followed by a range of transportation issues, including shipping delays at multiple West Coast ports, rail bottlenecks, workforce deficiencies and an alarming lack of trucks.

All of that combined to create a logistical perfect storm across the supply chain. And the problem hasn’t peaked yet. “The amount of goods the ports are handling now is far above pre-pandemic levels,” Basu says. “And while they’re taking steps to deal with this, they just can’t keep up with this massive movement of goods between economies.”

That’s the bad news. The good news: Contractors are figuring out a variety of fixes, workarounds and other solutions for untangling the supply chain.

PRICE VARIABILITY AND UNPREDICTABILITY

For years, the owner-designer-contractor conversation around materials was primarily about cost and vendor alignment. Now, there’s another, more urgent variable: lead time—which, for most projects, is much longer and more unpredictable than ever. Expedited shipping costs and inflation are now huge factors during every project analysis, with some owners, particularly in the industrial market, doling out millions of dollars for expedited shipping.

Brandon Mabile, business development manager for Performance Contractors in Baton Rouge, says industrial owners are more sensitive to supply-chain issues and must closely analyze return on investment for every dollar spent. In recent months, the “cost economics” due to inflation and lead-time issues have flipped, resulting in many projects being postponed or canceled. Still, Mabile expects Performance’s work volume to increase in 2022. “Last year, we really felt the impact of projects being pushed or canceled due to the supply chain, inflation or political reasons,” Mabile says. “We’re now seeing a little bit of a rebound.”

For their part, contractors are getting involved earlier in a project’s lifecycle and collaborating with owners and other team members to work through logistical hurdles and minimize risk. Some of the more radical solutions have been in procurement, with the entirety of a project’s materials and equipment more frequently being ordered long before groundbreaking. The offsite modularization of project components has become another popular way to minimize risk, a trend that began long before the pandemic.

Mabile says Performance, which primarily works capital projects in the industrial market, has been challenged more by price instability than shipping delays in recent months. “We’re able to get the materials that we need, for the most part, by shopping around,” he says, “but price variability and unpredictably is a big problem when bidding. For some of the more exotic materials, prices are being quoted for hours or days instead of weeks or months.”

To accommodate this new reality, Performance has become more upfront with clients about the challenges it’s facing. “We make sure they understand where cost growth may or may not occur, and we look at such things as risk sharing when there’s a certain potential of price growth,” Mabile says. “Other times, we’ll get a price; then when it’s time to start the project, we’ll get two or three bids and provide the owner with a cost-plus rate.” He adds: “Obviously, we can’t take a project and lose our tails because the cost of materials goes through the roof.”

Mabile also sees a trend toward “lump-sum” contracts in the industrial space. Plus, owners are buying more of their construction materials before even hiring a contractor—which requires that designs be completed well in advance of a project breaking ground. “In those cases,” Mabile says, “they might buy 80% of the materials and leave us to buy the last 20%.”

TRIPLE-QUOTING JOBS

Brendan McAndrews, chief operating officer of McAndrews Windows and Glass in Cincinnati, says his glass and glazing company has experienced “a multitude” of supply-chain issues over the last year. Inflation is a major concern, particularly when it comes to aluminum, which has increased some 30% to 40% in cost over the last year. Aluminum extruders are also running behind schedule.

The company’s biggest recent challenge has been getting a critical PPG paint additive that enables paint to bind to aluminum (as one of its services, McAndrews manufactures aluminum systems to support the glass). About 20% of McAndrews’ projects are currently being affected by the issue. In each case, the owner is given the option of switching from paint to an anodized finish or a different paint supplier to avoid a delay. “It has become a significant factor in the last month or two,” McAndrews says, “and taken our lead times from 10 weeks to 20-plus weeks.”

As a result, McAndrews is “triple-quoting jobs in many instances, just to get them off the ground,” he says. The company is also stocking up on standard colors and systems to sidestep potential delays. Still, there’s only so much they can do. “We stock enough so that we can turn around some of the small jobs pretty quickly without the impact on cost or lead time,” McAndrews says, “but we’re not going to have enough for a typical big job.”

Similar to Performance, McAndrews is transparent about supply-chain issues with owners, meeting with them early in a project to discuss flexibility in terms of timeline, specifications and vendors. The lead times on materials often come as a shock. “We send them submittals, tell them the timelines and they freak out,” McAndrews says. “Then we’ll give them other options. They can go with an anodized finish, or there are other brands that might not be having similar issues but don’t have the same color range as PPG.”

The planning process takes significantly longer, as a lot of additional back and forth is needed between architects and owners regarding changes in specifications, cost impacts and other factors. “There’s just more conversation than there used to be,” McAndrews says. “It’s typically a difficult conversation, where they’ll need to change the specs or wait until we have product.”

THE RIGHT DIRECTION

Brett McMahon, chair and CEO of Miller & Long Co. Inc. in Bethesda, Maryland, says his concrete construction firm was less affected than others at the onset of the supply-chain disruption, but that’s changing. Miller’s problems began with some rather obscure products, such as the cans for spray paint and nails, “but increasingly the shipments of cement and other items are getting hard to schedule,” McMahon says. “Just finding someone to drive the delivery truck is an issue.”

It’s a job-wide problem. “A material delay for one contractor can have a ripple effect that impacts the entire schedule,” McMahon says. “Decisions that don’t have anything to do with us still impact us and everyone else on the job.” Fortunately, designers and owners have become more flexible and more willing to accept materials substitutes. “It was an uphill battle in the beginning,” McMahon says, “but that’s been getting better.”

To Michael Coakley, co-president of drywall contractor C.J. Coakley Co. Inc. in Fairfax, Virginia, it’s clear that materials distributors are absorbing the brunt of the problem, “because they’re the ones having to do the gymnastics on this.” He adds: “The manufacturers keep changing their lead times and prices, and they have to be the ones to deal with it. They’re all struggling mightily right now to deal with that.”

Steel is a particular concern. C.J. Coakley typically buys coil steel from wholesalers to make studs, but in 2021 the material was nowhere to be found. And while the supply has rebounded somewhat, price quotes have been reduced from 120 to 30 days. “Steel is in such short supply that the prices have climbed astronomically,” Coakley says. “Steel is in everything. It’s in concrete, conduit, mechanical equipment—everything. So, they’re getting hit on all ends of the spectrum for this stuff.”

Auto manufacturers have exacerbated the problem. As they ramped up production at the end of 2020, they placed massive orders for steel. “Their answer to the supply-chain problem was to order more than they needed,” Coakley says. “Everyone has this massive demand for something that’s just not available, and it drove up the price.” He adds: “The worst thing is the uncertainty on pricing. In the past, we might have been plus or minus 10%, but not 400%.”

Looking ahead, however, Coakley is already seeing a change in the right direction. “I can actually get supply now,” he says. “It’s three or four months out, but we can get it. That means there’s more product in the marketplace.”

Other materials that Coakley needs are also being affected, if not to the same extent, including drywall and studs, which have six- to eight-week turnarounds, “so we’re projecting out a lot further than we would normally.” That’s become par for the course in the current environment, where earlier and more comprehensive planning is critical. “If you’re planning out in front,” Coakley says, “you should be able to get the material you need.”

HIGH PRICES = HIGH PRICES

Despite the uncertainty, Basu is confident that basic economic principles eventually will hold true. “The cure for high prices is high prices,” he says. “That means as the year progresses, there will be some alleviation of commodity prices such as steel, copper and aluminum, because producers have an incentive to produce more in a high-price environment.” Basu also expects to see an uptick in equipment purchases “precisely because producers can’t find enough workers. They’re looking to boost productivity, and that leads to the purchase of more equipment.”

Of course, the pandemic still has the potential to spoil everything; certainly, all bets are off if another variant emerges later in the year. Additionally, surging energy prices are making production less profitable. “It’s taking more money to transport your materials,” Basu says. “It might have wiped out whatever profit margin you might have had.” As a result, even though some owners might be planning to increase production, they nonetheless could choose to wait “because they’re getting squeezed by whomever is delivering your product.”

But, still, Basu offers more good news. In 2021, the world set a record for cargo-ship orders, and supply-chain issues have created a desire to expand manufacturing capacity. “As that happens,” Basu says, “we hope to see some of these supply-chain issues abate and prices fall.”

Dive Brief:

• Commodity prices will come down before the end of 2022 but supply chain issues will persist for years and a recession is on the horizon in 2023, a leading construction economist predicted.
• In a James Bond-themed presentation titled “No Time to Buy,” Associated Builders and Contractors Chief Economist Anirban Basu emphasized the historic price inflation dogging contractors, with input prices for construction rising 24.4% year over year through February.
• Planned interest rate hikes will likely temper those increases by year’s end, he said, but will also lead to a short-lived economic contraction. “The Federal Reserve has engaged in eight interest rate tightening cycles since the early 1980s,” Basu said. “Six have ended in recession.”

Dive Insight:

Basu’s current economic outlook portends a tougher bid environment for contractors going forward as they try to add new jobs to their pipelines in the face of even higher price escalations. In 2021, Basu challenged the Fed’s outlook that rising inflation was a transitory event, a view that proved prescient.

But while Basu’s presentation focused on the longer-term impacts of inflation, the supply chain, labor shortages and the war in Ukraine, it also outlined continued expansion for the immediate future.

“This will be a year of growth, but 2023 could be very different,” Basu said during a webcast with ABC members March 30. He pointed to the prospect of “stagflation” on the horizon, the combination of a tepid economy amid unusually high price increases.

He predicted that when first-quarter GDP numbers come out this month, they’ll show just 1% growth, but that inflation will continue to rise. “As long as you have supply chain issues, you still have price escalations,” Basu said. “And I think 2023 could get that kind of stagflation.”

Supply chain issues, which have hit construction harder than the broader economy and have pushed prices for critical materials such as steel mill products up by 74.4% in the last twelve months, will persist, according to Basu.

No magic wand

Due to much of the world still dealing with COVID-19, and many countries not having as plentiful access to vaccines as the U.S. to inoculate workers, he said there would still be a lag in the global production of materials.

“Even if COVID went away tomorrow and the Russia-Ukraine war ended, these supply chain troubles last into 2023 and in some cases 2024,” he said. “It takes a long time to build capacity.”

Despite these challenges, contractor optimism has largely stayed positive. But cracks are beginning to show in that outlook, as contractors’ expectations for profit margin growth have begun to flatten, according to ABC’s Construction Confidence Index.

The lack of supplies will continue to drive inflation to an even greater degree than current government projections, in Basu’s view. While the Fed is forecasting 4.3% inflation in 2022, Basu pegged his outlook closer to 5%.

“Along with rising wages amidst the Great Resignation, this unbalanced economy translates into higher-than-average inflation in 2022,” Basu said.

Given that outlook, he advised transportation officials to back weight their spending of dollars from the $1.2 trillion bipartisan infrastructure act until 2024 or 2025, when they will buy more for taxpayers.

“If you try to rush this, you’re going to be delivering or receiving construction services at a time when prices are really high and capacity is really constrained,” Basu said. “If I was a director of transportation in a certain state, I would spread out the construction work” over two to four years, he said.

By contrast, one bright spot has been the apartment sector. While most commercial contractors focus on nonresidential projects, there is crossover for some on multifamily developments.

“Apartment permitting is skyrocketing,” Basu said. “Some of you are involved in that multifamily market, and so that should be one of the stronger markets for you going forward.”

In spite of that momentum, Basu pointed to evidence that inflated pricing and persistent labor shortages are already causing owners to hit the brakes on proposed nonresidential projects.

He cited recent growth in the Architectural Billings Index, which tracks early stage design work and is hence used as a leading indicator for construction down the road. But that data hasn’t aligned with actual nonresidential fixed investment in structures as tracked by the U.S. Bureau of Economic Analysis, which has mostly fallen during the pandemic.

The reason why, Basu postulated, is that investors who have mandates to put capital to work have pressured developers to at least start outlining projects. But once they get to the bid phase, inflationary cost overruns have forced them back to the sidelines.

“I would think that there would be even more construction taking place based on design work that’s transpiring,” Basu reasons. But project owners looking at their pro forma — or the projected return on their projects — are seeing a disconnect with actual bids. The thinking at that point from developers is, “‘My pro forma is therefore busted, and I can’t move forward with this project,'” Basu said.

Good news

The silver lining of the outlook came from commodity futures. Basu said projected economic weakness in China, paired with decreased commodities futures pricing due to anticipated interest rate hikes, likely mean some relief is in sight.

“For many of these other commodities, like steel, I think these prices are going to fall significantly later this year,” Basu said.

In other words for construction, right now is no time to buy. At least not yet.

A federal judge in Texas has nixed the Biden Department of Labor’s withdrawal of a Trump administration rule governing whether a worker is an employee or an independent contractor.

U.S. District Court Judge Marcia A. Crone reinstated the Trump independent contractor rule, finding that the DOL violated federal administrative procedures in the way it delayed and then withdrew the rule.

Judge Crone agreed with the plaintiffs — the Coalition for Workforce Innovation, Associated Builders and Contractors of Southeast Texas, Associated Builders and Contractors and Financial Services Institute — that DOL failed to provide sufficient notice, consider alternatives, and give time for meaningful comment before withdrawing the rule that was to go into effect shortly after the Biden team took office.

The Trump rule was published on Jan. 7, 2021, with an effective date of March 8, 2021. The Biden administration delayed the effective date of the rule in January, and then on May 6 withdrew it entirely.

The judge’s ruling means the Trump independent contractor rule remains in effect dating back to March 8, 2021, and the ball is back in the Biden court.

The DOL argued that the 19-day comment period for comment on the proposed delay was adequate as it received more than 1,500 comments compared to the approximately 1,800 comments received in response to the rule when it was published in September 2020.

However, the judge noted that while the Administrative Procedures Act (APA) does not mandate the minimum number of days necessary for adequate comment, circumstances warranting a comment period of less than 30 days are “rare” and generally require “good cause.”

She found that the defendants failed to establish that any “serious, imminent harm” would result if the Trump independent contractor rule were to have gone into effect on March 8, 2021. “The court surmises that had the rule gone into effect, some employees may have been reclassified as independent contractors, but it is unlikely that the Independent Contractor Rule would have caused grave harm to the safety or security of American workers,” she wrote.

She also found that DOL failed to consider alternatives to the total withdrawal of the rule and, in so doing, failed to “consider important aspects of the problem before it — the lack of clarity of the economic realities test and the need for regulatory certainty.”

The independent contractor rule was an effort to provide clarity to the economic realities test — the multi-factor test used by courts to “determine whether, as a matter of economic reality, an individual is in business for himself or herself as an independent contractor, or is an employee of another” under the Fair Labor Standards Act (FSLA). The economic realities test has evolved over time in courts but has typically included five or six factors.

The factors courts have applied under the economic realities test have included: the nature and degree of control exercised by the company over the worker; the worker’s opportunity for profit or loss; the worker’s investment in the business; the permanence of the working relationship; the degree of skill required to perform the work; and the extent to which the work is an integral part of the company’s business.

The Trump rule sought to have two of the factors — the nature and degree of control over the work and the individual’s opportunity for profit or loss — carry more weight than the other factors, with the reasoning being that if they both point towards the same classification, there is a “substantial likelihood that is the individual’s accurate classification.”

Advocates for the Trump rule argued that this approach would clarify the status of workers in an age of app-services firms like Uber, DashDoor and Instacart by narrowing the review and prioritizing certain factors to be weighed in deciding if a worker is an employee or an independent contractor.

The plaintiff Coalition for Workforce Innovation maintains that current workforce and labor laws are “woefully outdated.” Its members include Uber, Lyft, the American Staffing Association, Kelly Services, Amway, Mary Kay, Intact Insurance and other firms,

According to the Biden DOL, the Trump rule’s prioritization of two “core factors” for determining employee status under the FSLA would have undermined the “longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.”

The Biden administration sought to restore the previous approach to enforcing the FSLA that allows companies to classify their contractors as independent but requires a broader analysis. The Biden administration contends that the Trump rule narrowed the definition of employee and could result in workers losing federal protections for minimum wage and overtime compensation, as well as jeopardize their unemployment insurance and workers’ compensation benefits. Workers classified as independent contractors could also face more difficulty forming unions than employees.

“By withdrawing the independent contractor rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect,” said Secretary of Labor Marty Walsh in announcing the withdrawal.

Asked whether the Biden administration would appeal the court ruling or begin a new rulemaking process, Seema Nanda, the lawyer for the DOL, said the administration “is evaluating all legal options, including the potential need for rulemaking.”

“When employers misclassify workers as independent contractors, workers lose key rights and protections, hurting labor standards across the board and making it harder for law-abiding employers

to compete on an even playing field,” Nanda said in a statement to Insurance Journal.

The construction industry will need to attract nearly 650,000 additional workers on top of the normal pace of hiring in 2022 to meet the demand for labor, according to a model developed by Associated Builders and Contractors (ABC).

“ABC’s 2022 workforce shortage analysis sends a message loud and clear: The construction industry desperately needs qualified, skilled craft professionals to build America,” said Michael Bellaman, ABC president and CEO. “The Infrastructure Investment and Jobs Act passed in November and stimulus from COVID-19 relief will pump billions in new spending into our nation’s most critical infrastructure, and qualified craft professionals are essential to efficiently modernize roads, bridges, energy production and other projects across the country. More regulations and less worker freedom make it harder to fill these jobs.”

ABC’s proprietary model uses the historical relationship between inflation-adjusted construction spending growth, sourced from the U.S. Census Bureau’s Value of Construction Put in Place survey, and payroll construction employment, sourced from the U.S. Bureau of Labor Statistics, to convert anticipated increases in construction outlays into demand for construction labor at a rate of approximately 3,900 new jobs per billion dollars of additional construction spending. This increased demand is added to the current level of above-average job openings. Projected industry retirements, shifts to other industries and other forms of anticipated separation are also factored into the model.

Based on historical Census Bureau Job-to-Job flow data, an estimated 1.2 million construction workers will leave their jobs to work in other industries in 2022. It is expected that this will be offset by an anticipated 1.3 million workers who will leave other industries to work in construction.

“The workforce shortage is the most acute challenge facing the construction industry despite sluggish spending growth,” said ABC Chief Economist Anirban Basu. “After accounting for inflation, construction spending has likely fallen over the past 12 months. As outlays from the infrastructure bill increase, construction spending will expand, exacerbating the chasm between supply and demand for labor.

“An added concern is the decline in the number of construction workers ages 25-54, which fell 8% over the past decade. Meanwhile, the share of older workers exiting the workforce soared,” said Basu. “According to the Centers for Disease Control and Prevention, the industry’s average age of retirement is 61, and more than one in five construction workers are currently older than 55.

“The scarcity of qualified skilled workers is an even more pressing issue,” said Basu. “Since 2011, the number of entry-level construction laborers has increased 72.8%, while the number of total construction workers is up just 24.7%. For reference, the number of electricians was up 23.9% over that span while the number of carpenters actually declined 7.5%. The number of construction managers has increased by just 2.1%. More than 40% of construction workforce growth over the past decade is comprised of low-skilled construction laborers, who represent just 19% of the workforce.

“The roughly 650,000 workers needed must quickly acquire specialized skills,” said Basu. “With many industries outside of construction also competing for increasingly scarce labor, the industry must take drastic steps to ensure future workforce demands are met.”

In 2023, the industry will need to bring in nearly 590,000 new workers on top of normal hiring to meet industry demand, and that’s presuming that construction spending growth slows next year.

“Now is the time to consider a career in construction,” said Bellaman. “The vocation offers competitive wages and many opportunities to both begin and advance in an industry that builds the places where we work, play, worship, learn and heal. ABC member contractors use flexible, competency-based and market-driven education methodologies to build a construction workforce that is safe, skilled and productive. This all-of-the-above approach to workforce development has produced a network of ABC chapters and affiliates across the country that offer more than 800 apprenticeship, craft, safety and management education programs—including more than 300 registered apprenticeship programs across 20 different occupations—to build the people who build America.”

Click here to view ABC’s methodology in creating the workforce shortage model.

Covid-19 has caused major disruptions in the construction workforce, and the expected infusion of funds from the Infrastructure Investment and Jobs Act (IIJA) will further pinch contractors’ ability to find enough workers to complete projects, according to the Associated Builders and Contractors.

According to a newly released model developed by ABC the industry will need to attract nearly 650,000 additional workers above its normal hiring pace in 2022 to meet the demand for labor.

“The workforce shortage is the most acute challenge facing the construction industry despite sluggish spending growth,” says Anirban Basu, ABC’s chief economist.

But spending is about to increase dramatically through the rollout of the infrastructure law, “exacerbating the chasm between supply and demand for labor,” Basu adds.

Potential impacts could include: project delays; increased costs for projects that will be passed on to clients, and, ultimately, consumers; and less “bang for the buck” on IIJA projects because projects will cost more, Basu says.

Project delays already are occurring. For example, on Feb. 15, a Taiwanese manufacturer announced that it would extend the completion date by six months for a new $12-billion chip fabrication plant in Phoenix, citing labor shortages as the primary cause.

An additional concern is the decline in the number of construction workers aged 25-54, which fell 8% over the past decade, Basu says.

At the same time, the number of people retiring and exiting the workforce has soared, with more than one in five construction workers nearing retirement age. Low-skilled construction laborers account for most of the growth in the construction workforce, ABC says.

Labor unions and contractors that work with union labor are also feeling the pain, says Kevin Tighe, vice president of labor relations and field service at the National Electrical Contractors Association (NECA), whose members are electrical contractors that hire International Brotherhood of Electrical Workers (IBEW) labor to staff their jobs.

Tighe says, “Manpower shortages are our biggest concern right now. There’s large projects coming where we’re struggling to figure out ways to [fully staff].”

Whether union-affiliated or not, contractors are all “competing for the same people,” Tighe says. As a result, he adds, “Everyone’s increasing their wages, everyone’s increasing the extras paid on jobs sites. There is a war for talent.”

In the short term, in  “hot spots” such as cities in Arizona and Texas experiencing severe shortages, NECA and IBEW are using social media, job fairs, hiring websites and other outreach methods to attract the talent needed to fill a growing list of large projects.

NECA and IBEW have created a workforce recruitment task force to take a longer view of the challenge.

NECA also has long worked with groups like Ready for Work to hire formerly incarcerated youth into pre-apprenticeship programs and has federal grants to team with such programs in about 20 cities across the U.S. “We are 100% committed to help knock the doors [to gainful employment] down,” Tighe says.

ABC has similar outreach programs and its own workforce development centers across the nation. ABC’s Baltimore Chapter recently established a workforce training academy in East Baltimore, an economically disadvantaged community, and has reached “a lot of people who otherwise might not be aware of the opportunities” presented by construction work, Basu says.