Supply Chain Market Bulletin May 2023

SUPPLY CHAIN Market Update Bulletin

May 2023

Lead Author: David C. Hamilton, Vice President, Dir. of Purchasing

Introduction

Back-to-work policies in the office sector have gained momentum, but office construction is not yet fully feeling the effects Other sectors, notably data centers, are experiencing growth, resulting in significant impacts on the supply chain. Construction spending on manufacturing projects has reached record levels, with businesses enticed by government incentives to establish production in the US. The availability of electrical gear remains a persistent challenge, and the exceptionally long lead times aren’t showing any signs of improvement. Subcontractor financial risk has reached unprecedented highs, while labor shortages continue to afflict the Southwest and Mountain regions. This report aims to delve into these circumstances in detail and shed light on the potential ramifications they may have on current and upcoming projects.

Logistics

• Container prices for import/export are still decreasing, although not as rapidly as a few months ago. They have dropped by nearly 90% in a year and are currently at approximately $2500 China-East Coast.

• Fuel costs have stabilized, which is welcome news for onthe-road trucking. The load-to-truck ratio has declined throughout most states; the Gulf Coast states and LA are experiencing very tight capacities.

• Negotiations over automated machinery between West Coast port unions and dockworkers has slowed the process of cargo handling. The large transitions underway are shifting the balance of cargo arriving from the West Coast to the East Coast.

Mitigation Strategies

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Economic Outlook

• As reported in the Wall Street Journal, persistent inflation will keep interest rates elevated and recession risks high

• Electrical components and gear will see significant price increases.

• Copper availability and costs are a concern due to the growth of EV, solar and green technologies.

Subcontractor Financials

• There is a continued high risk of defaults, especially in the Northeast. Subcontractor market volatility heading into an economic downturn has us concerned.

• Overly aggressive bid pricing is a compounding concern. Our estimating teams are well aware and work to ensure potential pitfalls are mitigated.

• Cashflow management is essential for subcontractors’ livelihood. Timely payment ensures our trade partners are sufficiently funded to procure materials effectively and maintain an adequate workforce.

• We recommend Subcontractor Default Insurance (SDI) to help ensure projects do not experience delays if a sub defaults.

HIGHLY IMPACTED MATERIALS / GOODS / LABOR

• General – While most manufacturers are nearly back to normal, pre-purchasing equipment and materials especially HVAC and electrical equipment can help mitigate very long lead-time issues and help protect project schedules.

• HVAC & Electrical Equipment – Delays in production of crucial components persist. This is causing bottlenecks in the production of units/equipment. Microprocessors are still facing prolonged supply chain challenges. The Mission Critical sector, particularly data centers, is growing steadily, creating an ongoing strong demand for AC and electrical equipment.

• Copper – The development and continued growth of green technologies, EVs, and solar panels is putting a strain on copper supplies, plus the difficulties of expanding mining capabilities. The supply gap will only continue to widen and could push pricing for electrical items and piping higher.

• Doors & Frames – Wood door suppliers are anticipating their lengthy lead times to get better as the labor shortages of 2022 and early 2023 improve.

NOTABLE COST CHANGES

• General – Our “cost benchmarking” team has observed significant deviations between national cost trends and local market behavior. Backlog is stable nationally; certain cities have cooled significantly while others experience rapid growth. Cost escalation can defy these trends though--some less active markets are experiencing higher increases in construction costs while some active markets are not Engaging experienced, local (STO Building Group!) construction professionals as early as possible will help clarify current cost and schedule impacts. Please review our latest Cost Benchmarking Report on our website for more insights.

• Copper – As noted above, copper availability is having long-range effects on cost, particularly in data cabling, electrical wiring, electrical components, and HVAC equipment.

Lead times:

o Wood veneer doors: 12-14 weeks.

o Exotic or reclaimed wood doors: 20+ week

• Electronic Components – Including HVAC and lighting, control systems are still running much longer than prepandemic times. Since systems are proprietary and difficult to substitute and maintain warranties, this means little flexibility or even ability to leverage better lead times.

• Labor – According to the US Bureau of Labor Statistics, construction employment rose in the first quarter of 2023. However, the demand for skilled labor in the Southwest and Mountain West regions of the country continues to exceed availability due to the continued surge in data center and manufacturing construction. On the bright side, other areas of the country are starting to see an ease in labor constraints as retail and hospitality construction starts have eased.

• Labor – Costs have been forecasted to rise around 4% in this fiscal year. As noted earlier, there can be significant disparities between regions. The Southwest and Mountain West are experiencing much higher demand and, therefore, rising costs Union labor markets remain steady, but concerns around wage theft laws in San Francisco and New York have created some unpredicted concern for what could be higher latent costs of labor.

• Concrete – Significant monthly increases in the cost of concrete has gotten our attention in the Southwest, especially Texas These increases are linked to the popularity of straight cement mixes as the fly ash concerns of coal-fired plants increase and the unprecedented level of road construction