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First, the pandemic changed the way people live and work. Then, it caused massive disruption in the supply chain, leading to a shortage of most materials like lumber, steel, pipe, etc. Now the country is facing a lack of skilled labor across many industries. This trifecta of cultural shifts has put a heavy burden on the construction industry in the midst of increasing demand for its products and services. 

What’s driving this wave of construction demand? Simply put, Americans embraced the new normal, including flexible work and school options. Business executives are reimagining the physical workplace and homeowners are moving or renovating to meet a new hybrid lifestyle.

Early on in the pandemic, outbreaks prompted people and businesses to move out of larger cities and remote work options opened up the opportunity for easier relocation. The market reacted swiftly with the demand for construction jobs rebounding after initial restrictions eased nationwide. Seemingly overnight, a significant upswing in work was moving away from rural cities in California and New York to places like Florida. 

As more people get vaccinated and make new decisions about their families these changes will continue. Families that moved from cities with heavy restrictions to places with fewer restrictions are putting down permanent roots. These new housing projects also mean new projects to build roads, shopping centers and schools for booming communities.

This demographic shift spilled into the workforce, too. Employees and their employers learned that their efficiency and productivity remained high while working remotely, and are not as quick to return to a physical workplace when COVID-19 variants are still breaking daily records. In fact, many workers may only return to the office a few days a week in traditional work spaces, which may allow firms to reduce their leased space. Further, commercial real estate owners will be forced to adjust existing office space, which could increase interior renovation work, rather than new office buildings. 

Shortages of skilled labor across the country combined with a scarcity of materials may make the next wave of demand even more pronounced. Practically everything from lumber to steel increased in price, with some contractors completely unable to secure materials or equipment, or even if they can, the commitments on price and quantity are very short term in nature. The reality is that pockets of the shipping and transportation industry are still struggling to secure drivers to deliver materials to the jobsite. 

Furthermore, a new infrastructure bill is working its way through Congress that may increase demand for both materials and labor in the industry. While typically work is always a good thing, it is likely to arrive at a time when shortages are still high and pricing is even higher. The ability to be able to price fixed priced contracts is and will be extremely challenging for contractors.

To address impacts of supply chain disruption and general shortages, contractors should consult with their owners, legal and risk management teams on ways to address these problems early in the contracting process. This may require owners to advance funds to lock in pricing or to order and store materials off-site well before they are needed. Negotiating escalation clauses in contracts become critical. Owner selections will need to be made much earlier than previously required.

Some contracts may allow for extensions of time due to "unusual" delivery delays. Contractors should review contract language closely when negotiating, and redline it to clarify what constitutes an “unusual delay” with owners in the current environment. It’s still critical that contractors update their schedules regularly, and increase their diligence on tracking even the most basic materials.

The greatest risk to monitor right now is any sudden change in prices, especially for hard-bid contracts. Many public owners require bid bonds pursuant to which contractors guarantee their price and that they will enter into the contract at that stipulated cost. Most public bidding documents do not allow changes in contract terms and conditions that might be able to be negotiated on private projects. Due to this changing environment, contractors should understand this and price accordingly with contingencies. 

While prices for equipment and materials may eventually return to normal, it’s unlikely to change in 2021. All contractors and suppliers should adjust their contracts and management practices to address those disruptions and price hikes. If contractors and suppliers cannot get price protection in their contracts, materials should be purchased as far in advance as possible to lock in pricing, and request earlier delivery to help avoid disruption.

It is imperative that construction managers are working with an insurance brokerage, legal and risk management team specializing in a particular industry or geography. As the industry continues to face labor shortages, supply chain disruption and increase in demand, a strong team that understands current and emerging risks can make a big difference to the bottom line. 

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