Construction Material Supply Chain Impacts
Low-end estimates suggest the U.S. procures around 30 percent of its construction materials from China, however, some firms are dependent on China for up to 80 percent of their materials. With international suppliers and logistics companies, many of which are China-based, shutting down operations in an attempt to contain the outbreak, U.S. contractors are already experiencing difficulties with their material supply chain.
U.S. construction relies heavily on international shipments of materials, including steel, copper, aluminum, stone and fixtures, many of which originate from China. The Port of Los Angeles reported a 23 percent year-over-year reduction in shipping containers in February following the shutdown of Chinese manufacturing facilities. Further reductions in imports are expected as the situation continues. This type of supply chain disruption is not unique to California with contractors nationwide expressing difficulties in acquiring certain materials.
Although some Chinese suppliers have begun to resume operations, they are doing so largely with reduced workforces and prioritizing a backlog of orders built up since January. Typical lead times for the shipment of Chinese-made goods to the U.S. is three weeks or more. This should be expected to increase over the coming months as suppliers battle to catch up on orders.
In light of this, it should be anticipated that reduced material availability will result in aggressive purchasing patterns and the potential to drive up national prices of high-demand goods. Price increases of copper, aluminum and casework have already been recorded. Further to potential price increases, the inability to procure materials will inevitably slow the overall rate of progress on many construction projects.
Contractor and Labor Impacts
Following the rise in U.S. cases of COVID-19, attempts to contain its spread have resulted in the implementation of emergency protocols, and in many cases, the city-wide and state-wide shutdown of all non-essential work. Such measures can affect the broader community and trigger significant challenges to the construction industry workforce. Constructiondive.com has produced a useful map summarizing the construction activities currently allowed in each state.
Even in cities and states where construction activities are considered essential, restrictions to public transportation and the closure of schools, child care facilities and businesses is expected to detrimentally impact workers’ ability to work. Many construction companies, site owners and contractors are already implementing travel bans for employees or travel restrictions on those workers originating from high-risk states. It is inevitable that the progression of some projects will be impeded by a shortage of skilled labor.
Global Economic Uncertainty
In the past weeks, the U.S. stock market has seen some of its greatest declines since ‘Black Monday’ in 1987. Investor anxiety has heightened in anticipation of the impacts of the COVID-19 outbreak on global economies. It has further been speculated that COVID-19 has the potential to trigger a global recession in 2020.
Under recession conditions, market activity would reduce with projects being canceled or subject to long-term postponement. In this event, demand for materials could decrease and the availability of labor would increase. New projects emerging during this period could see competitive contractor bids as the number of opportunities become scarce.
However, a chief economist for Associated Builders and Contractors suggests that typically, non-residential construction lags the overall economy by 12 to 18 months. As such, owners should be aware that contractors could face more difficult circumstances in 2021.
Despite the unforeseen nature of the COVID-19 pandemic, contractors could still be contractually responsible for delays or cost overruns on their current projects. It is expected that both contractors and owners will be carefully reviewing contracts to identify where contractual rights and duties exist under the conditions caused by the virus' spread.
It is recommended that owners review their contracts and take specific note of any force majeure provisions that allow for work to be suspended or terminated when certain extenuating circumstances arise. In some cases, opportunistic claims may be made, but the impacts of COVID-19, particularly regarding supply chain disruptions, are sufficiently broad and many claims will be valid.
Taken together, it is reasonable to assume that as the situation develops, the impacts on the U.S. construction market will inevitably be amplified, although the exact magnitude remains under speculation. Key factors to be cognizant of are impacts on labor force availability, the disruptions to construction component supply chains, specifically from manufacturers in the worst-affected countries, and claims. All factors have the potential to cause substantial construction delays and project cost overruns into 2021.
Background sources and useful links: