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December 1, 2022
For contractors, a surge in construction demand is the stuff that dreams are made on.
Blessed with ample work, firms like Skanska USA Building have thrived in sectors such as data centers, life sciences and education.
But the COVID-19 hangover has been hard to shake. Despite high demand for builders, the industry still struggles with getting needed materials in time.
China's recent zero-COVID lockdowns and America's dependence on key building components from China continue to create challenges for local projects. Skanska planners said they are facing down adversity with enhanced technology and accelerated planning.
It's not lumber and steel — rather, the smaller components of big projects that are hard to come by. While price fluctuations are always a concern, the new holy grail for construction planners is nailing down lead times for ordering key components.
Tom Park, vice president of strategic supply chain for Skanska, said the company determines underlying constraints deep in the supply chain and then partners with manufacturers to understand how those constraints will affect product costs and lead-times.
“Even with this effort, there have been periods of months, even weeks, where we've seen lead-times increase 25% to 40% in certain categories with certain manufacturers,” Park said. “In most cases, these increases were driven by rapidly increasing demand that is impossible to forecast since it's often driven by, for example, a large national entity building data centers or distribution centers.”
Staples of construction, such as lumber and steel, have come well off their peaks a couple years ago. But at the same time demand has stayed strong in the face of higher prices.
The unprecedented demand began with residential construction and remodeling during the pandemic and expanded to the commercial side, driven by major investments in infrastructure, education, health care, life science, data centers and more, Park said.
“It's not surprising that this process is now reversing itself as some commodity costs come down,” he said. “The only surprise might be the fact that the high costs have had a limited impact on demand. Several cash-rich markets like data centers, life sciences and education have been largely undeterred by these increasing costs.”
That puts greater pressure on planners to predict lead times.
Park said roofing, HVAC and electrical systems are being ordered more than six months earlier than normal. “Certain equipment including switchgear, air-cooled chillers and backup generators may need to be purchased 18 to 24 months in advance of the need date,” he said. “If project teams do not have this amount of time, they need to look at resequencing work and come up with temporary power or cooling measures in order to work around the permanent deliveries, which can be challenging.”
Rob Cantando, Skanska's national director of strategic supply chain, said Skanska's supply chain team has relationships with a wide range of construction materials and equipment manufacturers, which it leverages to get lead-time information direct from the source.
“This allows us to cut through some of the local supply chain noise that may be present in some markets,” he said. “We collect this lead-time data on a regular basis and make it available to our project teams through a Power BI dashboard, allowing our teams to plan their buyouts in the time needed to support our clients' schedules.” Power BI is a software data-analytics tool.
Park said that, while commodity prices have normalized, there are still areas that will need time before the supply chain is fixed.
“We believe it will take two to three years for HVAC equipment and electrical gear to fully recover due to lack of capacity in the component market,” he said. “HVAC and electrical gear companies are investing in new assembly capacity by expanding their factories. However, if they cannot get components, they are still not able to increase their shipping capacity.”
Park added that, within the last few months, there have been increasing issues in the HVAC equipment and electrical gear market due to supply chain disruptions and continued strong demand. He said limited capacity for components such as semiconductors coming from China, motors, and compressors are causing inefficiency at the assembly factories, as well.
And the HVAC shortage won't be over anytime soon. “Increasing supply of semiconductors is going to take several more years since those factories have a long lead-time to begin production and are primarily focused on more advanced semiconductors, not the ones typically used by automotive and commercial construction products,” he said.
With unrest in China due to COVID lockdowns, local contractors are looking for ways to improve the planning process, according to Lew Guerrette, executive vice president and general manager in Skanska USA's Seattle office.
In Seattle, Guerrette said his team has early discussions with clients, design teams and subcontractors to study project approaches that can mitigate cost and schedule issues. This alignment allows Skanska to secure delivery and production time slots early in the design process while ensuring cost certainty, he said.
“We are seeing more projects utilize collaborative delivery solutions such as progressive design-build and early onboarding of key subcontractor partners,” Guerrette said. “This collaborative and partnering approach incentivizes all parties who have a stake and ownership in the volatile supply chain to come together for the betterment of the project. I would expect to see this approach becoming more of the norm moving forward regardless of the supply chain situation as owners realize the benefits of early risk mitigation.”
With cost escalation rampant, Park said Skanska teams are on the lookout for savings.
“We have been working with architects and engineers to redesign aspects of projects in order to meet project schedules,” he said. “A great example was redesigning commercial roofing systems to replace polyiso insulation with extruded polystyrene insulation, which had a significantly lower lead-time. Lead-times for polyiso have now come down significantly recently, so that is not as big an issue today as it was a year ago.”
Alan Dunbar, senior vice president and regional director of preconstruction for Skanska, said that construction demand remains strong — making it necessary to continue to search for ways to overcome supply shortages.
“The Puget Sound construction marketplace remains extremely busy and project teams are adjusting to life with ongoing supply chain issues,” Dunbar said. “We're hopeful that categories one-by-one start returning to a better state, but we are becoming more nimble in reacting to the ‘new normal' we have today.”