The Struggle of Construction Companies Visualized: From Record-Breaking Material Prices to How They Are Bearing It

Raising Prices Is the Most Popular Solution for Companies to Cope

To better understand the real issues professionals face and their tools and solutions to cope with this trying period, we conducted a survey in 2021 to home improvement professionals (homebuilders, remodelers, and other professionals in the construction industry) to share their thoughts and experiences on the ways they are dealing with material price uncertainties

Raising their prices: Homebuilders have taken a multi-prong approach to dealing with the building material price increases. When asked to choose between one and three options, the majority of homebuilders we surveyed said that the main way they are coping with higher costs is by increasing their prices to cover it. 66% of respondents revealed they have raised their prices accordingly.

Focusing on the use of materials: A certain number of construction professionals say that they have focused on the way they use the materials. 23% told us they are using alternative materials. This way, they can do the same job but at a more acceptable price. Yet, this could entail benefits or drawbacks depending on the replacement material chosen, which may not be applicable for all projects. Another 23% share that they are reducing their waste of materials to maximize the bang they get for their buck.

Price escalation clauses: Many are including price escalation clauses in a fixed-price contract. 20% shared that they have introduced these clauses to deal with the price hikes of materials. Whereas these clauses can protect them from rising prices, they may also lead to lost contracts if homeowners are not willing to take on the risk of a potential price change mid-project.

Optimizing designs to use fewer materials: This is one approach that 18% say they are using. Opting for this strategy is not only money-saving, but also more eco-friendly.

Pre-ordering materials: Some said they pre-ordered and paid for lumber when prices dropped. This turned out to be wise given the increases seen once again in early 2022. 17% of respondents use this method to help guarantee the price remains level for the duration of any projects on the books. But it requires money upfront and a risk of prices falling in the future, which is a concern given the volatility of the market. For those who are not pre-ordering, many are opting to secure price guarantees from their suppliers for a period of time. Ben Neely from Riverbend Homes stated: “If we're under contract we have to absorb a lot of the price increases out of our profit if it’s a hard cost item. To combat this we just require more money up front to put down deposits and buy materials with our suppliers beforehand.“

Only 15% of homebuilders have canceled or postponed projects as a way of dealing with the issue, and 12% have opted for using advanced technologies. 8% reveal they have had to lay off staff. 2% state they have used a different approach. Jessica from Marketplace Homes has a different way of dealing with the price increases: “Increasing communication with clients to help manage their expectations when it comes to the cost of their new construction homes as well as preparing them to expect possible delays in the completion of their new construction home.”

Delays, Costs, and Labor Shortages Are Most Common Issues

As well as the increase in prices of materials, homebuilders have faced other issues during this cost crisis. When asked to reveal one to three issues they faced the most, 60% of the respondents say delays in deliveries, and 59% say increased fuel costs, while 52% agree that the labor shortage was causing them problems.

With a high demand for products, it is no wonder that there have been delays. Alpha Pro Tech states: “When Covid hit, we and every other company were not prepared for what was happening. People were staying in their homes, they were revamping their homes all of a sudden. The usage went up, and some of our competitors couldn’t get products.”

Greg Cantor, CEO of Murray Lampert Design says the issues mentioned have continued from 2021 into this year, saying, “We are facing the same challenges as last year. The manufacturers raise prices with little or no notice.”

12% who responded to the survey also share that there has been a delay in payments, complicating the situation even further for companies, and 8% declare increased expenditure on sanitation measures has been a major issue.

Beside the issues mentioned above there are some other difficulties the companies have experienced. A spokesperson from the manufacturing company Alpha ProTech Engineered Products, Inc. says “It is all due to container cost and shortage. As manufacturers, what has affected the price of our products the most is the cost of containers.”

The Main Effects of the Material Price Crisis

When asked about the main effects of this crisis on their business activity, the majority of contractors agreed that project delays due to material shortages were the main issue in 2021. According to our survey, 61% of the respondents saw delays due to material shortages. However, Neely believes that there is a shift this year, saying, “I think what we’re seeing in 2022 is more inflationary increases in material costs where 2021 was more supply and demand constraints which led to companies price gouging.” 36% of professionals are seeing clients postpone or cancel projects. Sarabeth South, home design expert at Fixr.com, comments on this, “Most people are still not canceling projects. However, many people are looking at lower cost materials or are delaying projects.”28% of experts say that they have had clients modify projects to deal with costs. Neely feels that this issue is still very prevalent throughout 2022. He shares his experience: “We haven’t had anyone cancel their project, however there have been some concessions on a few projects to save money. Things like changing a metal roof to a shingle roof, downgrading countertops or tile, or even shaving square footage off the design prior to final contract.”

Outlook for the Industry

Many agree that the repercussions of what we have seen over the past three years could be long-lasting. South sees more challenges ahead by stating: “With the ongoing recession and inflation, it could be a few more years before things really settle down. Where they settle remains to be seen.”

Alpha Pro Tech adds: “I think that housing starts are probably going to slow down a little bit in the market, but I think people are going to continue to do renovations to their properties ahead. So when it (the market) does turn back around, their houses are probably going to be worth more.”

Both home builders and homebuyers are facing unprecedented price increases in building materials. Hopefully, the next few months will shed some light on whether prices will return to normal and what we can expect for building projects moving forward. As our graphic shows, some of the materials that have seen the biggest increases in price are beginning to decline. Only time will tell if prices will remain unpredictable or if things can begin to return to some normality as we approach 2023. Neely sees a better future for the industry: “Overall I’m more bullish on the market stabilizing than I was in 2021. A pullback from the extreme of the last 2 years isn’t necessarily bad, it’s actually probably sustainable. If interest rates do get into the double digits I do think we’ll see a more significant slow down”.