The pandemic has truly been a wild and crazy journey for industries across the spectrum, including the harsh impact on the construction industry. The pandemic caused and continues to cause disruptions from shortages, transport problems, the greening of sectors, labor availability and trade problems in the construction industry.
The disruptions in the supply chain are seen in our everyday lives as businesses and consumers face a lack of supply of goods or very long lead times for delivery of goods. The disruptions began with the lockdown in China and then rapidly developed into the largest downturn in production ever recorded.
Lockdowns due to COVID-19 restrictions in the United States and shutdown of factories at the beginning of the pandemic caused shock waves to supply and demand which were unprecedented and were happening simultaneously.
Construction companies remembered the disruptions of the Great Recession in 2008. They saw investments plumet as capacity was scaled back in the aftermath of the global breakout of the virus. But they also saw something different. Ironically, the opposite of 2008 occurred and demand for produced goods returned very rapidly.
This quick rebound of demand was unexpected and caught the construction industry off guard and initially unprepared. Businesses scaled back production, some key producers actually closed their doors and went out of business and clients placed a hold or stopped construction projects.
Transportation of goods was severely disrupted and today it continues to be disrupted due to shortage of truck drivers, government regulations related to COVID-19 and other factors. The transportation disruption left supply chains very vulnerable at the beginning of the pandemic and to remain vulnerable now. Lead times of supply have lengthened dramatically and inventories have been drawn down to very low levels.
Demand continues to flow and increase, which has resulted in a more positive outlook despite severe disruptions. Agility has been a requirement in construction over the course of this pandemic and will continue to be so in 2022 and beyond.
Certain shortages have not caused such dramatic declines in production. For example, plastics production continues to hold steady, while sectors related to lumber – which experienced shortages and unrestrained price rises – continues to see output increase for now.
It may appear that the biggest economic shock from the pandemic is behind us, BUT the disruptions continue and are likely to stay with us well into 2022. Currently we are witnessing increases in construction product orders.
Construction companies are hoping to return to pre-pandemic profit margins from the global upturn as COVID-19 retreats. The outlook does remain optimistic despite all the disruptions for construction companies. Supply is holding back the construction industry at the moment, not demand.
Labor and equipment shortages have been plaguing the construction industry for some time. It is hard to find the right workers at the moment, but much more difficult to get hold of materials, which have been in short supply for a long time. The supply chain problems will continue to cause increasing backlogs of work.
Fierce competition caused moderate consumer price increases prior to the pandemic. However, the current higher input costs are forcing construction businesses to pass along the increased costs to the consumer. These price increases may be showing in some products and geographic areas to some degree now, but it is expected that this increased pricing trend will continue well into 2022.
Historically from 2013 to 2020, goods inflation has been moderate at best ranging between -0.1% and 0.7% Year-Over-Year. The pandemic initially caused a sharp downturn, but goods inflation is now on the rise.
Goods inflation is primed to take off from here as businesses are currently indicating as a group that they will increase prices in the months ahead. Container prices are severely elevated and prices for several commodities are well above pre-crisis levels. Therefore, it is a logical conclusion to expect price increases.
Shortages are expected to remain a pressing issue into early 2022 (perhaps beyond) and therefore elevated goods inflation and construction price increases are predicted for the coming quarters before settling down.
The convergence of all of the disruptions happening at this moment is a real and legitimate concern. However, the outlook remains quite positive on average for the construction industry. Shortages are anticipated for at least a few more quarters, along with new regulations that are on the horizon. These factors will challenge businesses to adhere to climate change targets, and to pay attention to the intensity of global trade relations. BUT the key factor driving the outlook remains DEMAND!
A synchronized demand recovery is underway. There are some expectations that there will be fading growth after that, as consumers revert to previous trends of demand. A word of caution is needed for those who believe that demand will fade away and the disruptions will not continue. One still should expect disruptions to continue.
Agility continues to be a critical strategic factor for construction businesses to thrive in the environment that companies currently face. Construction businesses that are able to adapt to changing demand, erratic supply, regulations and taxes are positioning their companies for a strong performance after the pandemic.
The real question is: The demand is there, but can the supply adjust quickly enough to deliver? Some sage advice to help answer this question comes from Clayton Christensen, American academic and business consultant who developed the theory of “digital innovation.”
“The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.”
Longtime columnist Glenn Ebersole is a registered professional engineer and a Strategic Business Development/Marketing Executive and Leader in the AEC industry and related fields. He can be reached at [email protected] or 717-575-8572.