Work on the mixed-use project at 950 Market Street is proceeding after delays caused by the pandemic. Initially set to open this summer, developer L37 Partners’ $380 million hotel, condominium and retail project is now scheduled to be completed by the second quarter of 2022. - Photo courtesy of Paul Burton
Pandemic Disrupts Supply Chain, Adds Costs, Underlining Importance of Labor Agreements and Project Execution
By Paul Burton, Contributing Writer
With the costs of construction materials rising over the past year, local contractors and union representatives have expressed concerns about how projects and jobs are impacted.
Construction industry publications have reported since last fall that prices for lumber, structural steel, copper, steel pipes, and concrete have risen dramatically since the COVID-19 pandemic began last March and global supply chains were disrupted. The online news site ForConstructionPros.com reported that “Engineering and construction costs increased for the fourth consecutive month in February” as “ocean freight from both Europe and Asia to the U.S. saw a sixth straight month of price increases.”
According to economists at London-based international financial services company IHS Markit, the cost increases are largely the result of “a shortage in container availability and port congestion that delayed ships and container movement, adding a premium on available space and impacting the overall costs of material transport.”
An article on ConstructionDive.com reported that from January 2020 to January 2021, the price of iron and steel increased by 15 to 25 percent and the price of softwood lumber rose by 73 percent. According to some estimates, the cost of wood used for framing in the residential market has doubled over the past year.
Many projects in the Bay Area are being built using metal framing instead of lumber and could be impacted by the increased costs of steel studs. And the cost of metal has forced contractors to consider using alternative materials like thermoplastic polyolefin roofing panels instead of steel. Other materials that have seen price increases include drywall, vinyl siding, transformers, and appliances and HVAC systems made from metals.
Ken Simonson, Chief Economist for the Associated General Contractors of America, said in February that the supply chain is still being affected. A shortage of empty shipping containers, outbreaks of COVID-19 among dockworkers, and other problems could delay construction projects and prevent the industry from recovering this year.
“Construction demand will remain spotty, both geographically and by project type,” Simonson said. “Any owner who is expecting to build new or renovate had better factor in the likelihood that there will be delays, and depending on how the risk is shared with contractors, price increases.”
Labor Costs Hold Steady, Expertise Shines Through
While material costs increased substantially, subcontractor labor costs increased only slightly, and only in the southern region of the U.S., according to the economists at IHS Markit cited in the ForConstructionPros.com report.
Adam Spillane at Cupertino Electric Inc. (CEI), an IBEW signatory contractor, told Organized Labor, “Increased material costs have slowed down construction projects in the Bay Area. Developers and owners are evaluating the feasibility of future projects due to rising costs. The volatility of material in today’s market has further compounded the issue as contractors cover the risk of commodity pricing.” Spillane pointed out that “our skilled union workforce at CEI means we have more predictable labor costs through the duration of a project.”
IBEW Local 6 Business Manager John Doherty noted that labor makes up only about 15 percent of the overall cost of construction. “When materials are expensive, that’s when it is important to have a well-trained and skilled workforce to make sure that the job is done right the first time,” he said.
SF Building Trades Council Secretary-Treasurer Rudy Gonzalez noted that union signatory contractors are “high-road employers” whose well-paid workers spend their earnings locally and boost the local economy.
“It is important to have policies like project labor agreements and workforce agreements in place that guarantee good wages and benefits, and mandate jobs for local workers and well-trained union apprentices,” Gonzalez said. “Several studies have shown that PLAs do not increase costs and can save money by ensuring a project is completed on time and on budget. Having stable, fixed labor costs provides for predictability in planning and bidding on projects.”
Gonzalez noted that the increased material costs should not be used by contractors, developers, and public agencies to undercut union wages.
Spillane said, “Union contractors like us, along with our union trade partners, are under constant pressure of being undercut by non-union contractors. Together, we must develop and execute more effective production plans to offset higher labor costs, provide greater production quality, deliver projects on time and, most importantly, maintain the highest safety standards.
“Contractors like us work closely with our field leadership teams to develop procurement and large material buyout plans to buy more effectively and manage costs.”
IBEW’s Doherty noted that the cost of labor is more strictly regulated than the cost of materials. While union contracts, local and state laws, and workforce agreements provide certainty in determining labor costs, material costs can rise or fall because of market forces, the drive for profits, and limitations imposed by a global pandemic.
With material costs expected to continue to increase at least through the first half of 2021, contractors and developers may have to adapt and make changes that could include cutting labor costs, shortening project schedules, changing the types of materials used, and speeding up the bidding process where it is possible.