Construction project profitability depends on accurate estimating. It’s why financially sound construction companies have a rigorous estimating process that involves analyzing historical project data and current market trends.
The Trump administration’s latest trade deal with China aims to pressure Beijing to significantly change unfair practices, such as intellectual property theft, forced technology transfer and currency devaluation. But will it be enough?
Supply Chain Issues
Construction projects that are delayed due to materials shortages or unreliable deliveries can add a significant cost burden. This may cause contractors to ask for extensions on insurance coverage.
Some companies are seeking alternative suppliers for common building materials such as concrete, metal joists, steel and more. These efforts are important to mitigate supply chain issues and keep projects on track. In addition, implementing a system to communicate with suppliers about potential delays may help to manage expectations.
Supply chain issues have become exacerbated since the COVID-19 pandemic by global instability, production and manufacturing setbacks, logistical bottlenecks and labor shortages. This perfect storm has led to double-digit price increases in materials and other components that can affect everything from insurers to contractors.
Many of the basic construction materials that have seen steep increases in cost and lengthened lead times are sourced from global manufacturers. This means that even if the US and China can reach a deal that lifts the tariffs, it will take time for these companies to increase production again.
Construction companies need to plan accordingly, including incorporating inflation rates into estimates and working with engineers and architects during the design phase to avoid selecting materials that will be unavailable or costly once the project is mobilized. It’s also a good idea to order long-lead items early to lock in prices and delivery dates.
Changes in Pricing
As a result of the COVID-19 era trade war, prices on raw materials like steel and aluminum have risen, while interest rates are increasing. This combination is likely to drive up construction costs.
In the long run, higher prices and uncertainty are not a good thing for the economy. The trade war is likely to reduce GDP and lead to a loss in employment. These effects are reflected in the recent report from Moody’s Analytics that estimates that the White House trade policies led to 300,000 fewer jobs and reduced US GDP by 0.3%.
The impact of the trade war on construction costs is a complex issue and depends on a number of factors, including locational indices of building cost trends and prevailing union wages for labor. In addition, there are a number of general price indices such as the Gross Domestic Product (GDP) price deflators and consumer price index compiled by the U.S. Department of Commerce, and special price indices that cover specific input factors such as wholesale building material prices and the ENR construction cost index.
Some studies based on quantitative model simulations suggest that international trade makes economies more resilient by increasing their ability to diversify supply sources and exploit foreign market power (Caselli and others 2022; Bonadio and others 2021). However, there is also evidence that higher import restrictions tend to hurt economic growth in developing countries.
Changes in Suppliers
Whether it’s a sudden 66% increase in the price of fabricated steel, or major spikes in wood products like OSB and LVL, COVID-19 responses and policies are creating unprecedented material prices across the construction industry. These price hikes are eating into already tight margins, and making it difficult for contractors to accurately estimate project costs.
During the course of 2018, numerous materials saw dramatic price increases due to supply chain bottlenecks and unfavorable economic conditions. These increases impacted project costs and resulted in budgets that were much higher than anticipated. This, in turn, forced contractors to make tough choices that impacted the integrity of their projects.
One of the most significant impacts that came from the trade war was the loss of low-cost suppliers. The imposition of tariffs essentially prevented the USA from accessing low-cost goods from China, and caused Chinese suppliers to seek new customers outside of the USA. In fact, a recent study found that the trade war pushed US companies to switch suppliers and shifted production to countries other than China in order to avoid tariffs.
This means that the USA loses the ability to access low-cost goods, and loses the ability to negotiate with those suppliers in order to reduce prices. Moreover, studies have shown that the escalation of the trade war led to higher costs for American consumers. This was because American companies were forced to pay more for raw materials, and pass on those increased costs to their clients.
Uncertainty
Construction projects are often affected by deep uncertainty at the early planning stages. Since the relevant information for a new project is often limited and cannot be gathered from similar previous projects, the probability distributions of the uncertainties can be difficult to determine during construction planning. The proposed approach aims to model this problem by using prediction intervals to describe how uncertainty will impact construction performance. This method is an alternative to probability-based methods, which have the disadvantage of relying on precise probability distributions.
The construction process is influenced by numerous factors, including the working productivity, material wastage rate, and weather. For each of these factors, a range of values can be determined through cross-validation from on-site tests and managers’ judgments. Then, the predicted uncertainty of the project duration and cost, represented by PI, can be estimated using a linear regression model.
According to interviews with several construction experts, the main uncertainties significantly affecting construction performance in the case project are the number of PC and CS workers and the amount of labor-intensive work, such as excavations. Moreover, the quality of the hybrid processing also has a significant effect on the average duration. The width of the PI range can be determined using the relationship between the total number of hours and the project duration.
The retaliatory tariffs from foreign countries are likely to result in reduced real income for the foreign countries, as well as depreciation of equipment based in the United States. However, the impact of these retaliatory tariffs on prices and welfare in the US will depend on the extent to which the foreign country restricts its exports. Consequently, further ex post empirical studies on the trade wars should focus on estimating these effects.