Trends in Raw Materials Costs & Lead Times
Both lead time (schedule) and cost are important to consider with construction. While this blog is focused on lead times, we will note some observations that tie into materials costs as well. It's important to note the commodities side of supplies. All parties within the supply chain, including skilled trades, product vendors, and contractors utilize materials such as structural steel, aluminum, lumber, and more. Commodities prices are best tracked through market indexes (example: Nasdaq lumber prices) so we will not focus too much on that topic. However, it is essential to note the effect commodities prices have on driving overall project costs and lead times.
Commodity lead times are reduced, but this has not trickled down to Products
Commoditized products such as precast and steel generally take longer than what might have been historically expected. Still, suppliers seem to have updated their production planning models, and the very extended lead times we saw in mid-2022 have been reduced slightly and are continuing to trend in that direction. There has been a recovery in commodity prices, but we do not yet see this positive trend showing itself at a product level.
However when dealing with these construction products beyond commodities, it's important to understand that the price increases and longer lead times are not solely tied to commodities prices, the supply chain is not a seamless vertical integration. You must factor in labor, machinery maintenance, the number of or lack of value-adding steps between raw materials and completed projects, and the overhead or indirect support incurred (for example the system you use to track part numbers against your Bill of Materials).
8 trends in construction material lead times in 2022
Prices in most commodity markets are back to pre-Covid, but the raw materials costs seem to be delayed in reaching the end products and projects (and in our opinion likely never will). Prices remain too volatile to predict while profit margins are holding strong.
Historically inconsequential purchases, such as roof membranes, MV conductors, and security devices, must be managed on an extended time frame: well before the duration when a project manager would traditionally need to make purchasing decisions.
Critical electrical and mechanical gear lead times still exceed a year and sometimes approach 18 months capacity.
- Generator enclosures continue to be one of the most sought-after need that cannot be met. The demand for these enclosures has cratered the existing production capacity with no sign of slowing. Multiple factors have contributed to this issue including the constant request for custom dimensions, scarcity of sheet metal, competing market(s) needs.
- There are competing market dynamics in play that are affecting product lead times and prices:
Hyperscalers are committing to core vendors well into 2025, creating competition for digital infrastructure developers.
Demand for these items is across an increased number of market verticals as critical infrastructure, as a whole, continues to be a global priority.
Unforeseen geopolitical concerns and extreme weather supersede project needs for power equipment needs.
- Many organizations are now pursuing added visibility into the second and third tiers of their supply chains to understand where issues are in order to prevent repeat of historic supply chain disruptions over the past two years. Areas of specific focus we have noticed include: breakers, relays, controls hardware, plug fans, transformers, semiconductors and more.
- Mega projects and mega customers across industries rely on the same product purchases and long standing relationships are simply not enough to meet demand. More doors are opening for new, emerging, and more innovative suppliers of products for the energy, semiconductor, battery, and ev spaces.
- Logistics offers significant cost savings, if done correctly. Consider logistics impact during the project planning phase, at minimum, in order to mitigate supply chain disruption before expediting is needed. Start measuring or tracking logistics costs before implementing a blanketed strategy to reduce cost. We have seen blanket decisions made to move work off-site due to labor productivity. However, if your model does not consider transport time, transport cost, potential storing needs, or have a measurable reduction target, you will create unnecessary churn and not see scalable benefits.
3 Trends we will be watching for in 2023
- What effect will the change in policy on Zero-Covid in China mean in terms of demand to supply chains?
- How will the global pursuit of greener energy affect construction costs as a whole? The cost of oil affects ~ 25-30% of different pieces across the entire project lifecycle. Will the shift to greener energy have a similar effect or will we see a sharp rise in cost, followed by a downward trend with more sustainable options?
- What effect will major project cancellation have on supplier capacity opening up? We have not seen any changes to date. Can and will the United States meet the capacity demand for Semiconductor and Data Center projects? How will the manufacturing capacity and material and equipment availability adjust to answer existing Owners projecting unprecedented construction demand, as well as new Owners looking to enter the US critical infrastructure market?
Taking control of rising materials costs in 2023
It's unlikely the construction industry will ever go back to pre-pandemic costs or lead times. To make the most of the reality we are working in you should focus on looking at the big picture (BOM cost reduction). That starts by understanding commodities costs, how they impact product your project needs, then integrating that information into planning, design, and execution of your projects. How can you get started?
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