SUPPLY CHAIN Market Update Bulletin December 2023
Lead Author: David Hamilton, Vice President, Dir. of Strategic Sourcing Introduction The construction outlook continues to be positive with a steady pipeline of RFPs for significant sized projects. Interestingly, while competition to win can be stiff, the mid- and smaller-size projects are numerous. As outlined in more detail below, reshoring of manufacturing and significant growth in the mission critical sector have strengthened the construction market. This uptick is most welcome from a workload point of view, but it has extended the lead times of HVAC and electrical gear and has kept costs from dropping—and in some sectors and trades, only ensured they increase. Differing drivers in the marketplace have reinforced the need to be nimble across regions and sectors, something the STO Building Group has nurtured in our multi-region and multi-sector approach through our nearly 50 offices.
Economic Outlook • While there continues to be evident volatility in the geopolitical sphere, our outlook continues to be pretty bullish. The concept of a "soft landing" is increasingly gaining traction in the media and among investors. • Continued implementation of mandatory return-to-work policies by numerous corporations suggests not only a possible growth in the commercial interiors market, but also a redefinition of common and amenity spaces offered to building tenants. • The elevated cost of electrical gear will remain stubborn due to the scarcity of raw material supplies well into next year. This has been and will continue to be driven by the rapid and sustained growth of green energy and “net zero” requirements, both inside and external to the construction industry.
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Subcontractor Impacts
• Availability – An uptick in retirements, aging workforce, acquisitions by PE firms, and mergers have affected the construction subcontractor landscape significantly. Careful monitoring is required to alleviate financial and labor risk. • Insurance costs – Due to increases in the number of claims, premiums cost hikes have been burdensome for subcontractors. This has been a major factor in some subcontractors deciding to wind down or entirely close their business. • Defaults – Overburdened subcontractors with high borrowing and a hardening around debt structures and terms have increased defaults across the industry. No single trade or geography seems to stand out. • Prequal – Comprehensive assessments of both bids and bidders, emphasizing thorough prequalification from multiple perspectives, to achieve a well-rounded evaluation is more necessary than ever. • Cashflow – Cash management to efficiently acquire materials and sustain an appropriate labor force is a balancing dilemma. • SDI – The importance of Subcontractor Default Insurance (SDI) has increased significantly, as it plays a key role in minimizing project delays in the event of a subcontractor default.