A lot of things seem out of control these days. As costs rise and disruptions in the supply chain persist – and without clear-cut ends to some of the most prominent causes of those issues – the pandemic or the war in Ukraine, for example – it’s unclear how long these challenges will persist. However, there are things business owners and executives can do to put themselves on solid footing to navigate and operate under the current circumstances.
During NJBIZ’s The Future of Construction and Development virtual panel discussion experts explained where we are, how we got here, and shed some light on ways to work around and through the setbacks.
NJBIZ Editor Jeffrey Kanige served as moderator for the May 24 event, joined by:
- Brad Bohler, principal, Bohler
- Zachary Csik, director, Real Estate-Commerical-NJ/PA, Rockefeller Group
- Kate Gibbs, deputy director, Engineers Labor-Employer Cooperative (ELEC)
- Lisa Lombardo, director, Construction Law & Litigation Team, Gibbons PC
- Mitchell Taraschi, co-chair, Construction Group, Connell Foley LLP
“[W]e’re really facing a perfect storm here,” Lombardo said of the current climate. She traced its start back to trade relations between U.S. and China under the Trump administration, leading directly into COVID and the disruptions the pandemic caused to production. “That was worldwide,” she explained. “So it’s not as if we can say all right, only a segment of the world is dealing with this, the entire world was dealing with it.”
And the entire world is still dealing with it, to at least some extent.
Not only have prices for commodities skyrocketed, but availability is precarious. “You just don’t know exactly what it’s going to be, and when it’s going to hit and it’s really difficult to plan for it,” Csik said of access to materials like steel, piping, roofing and even fire hydrants. Bohler agreed, pointing to swaps during construction due to delays for materials. One work around suggested by the group is to plan ahead.
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“Folks are ordering their materials in the approval process just to make sure they get in line so they’re not sitting there waiting … to go to construction for 12 months after they get their approvals,” Bohler said.
Taking that line of thinking a step further, Lombardo recommended ordering long lead items in advance—not hoarding, she cautioned, but warehousing the essentials, so “you have availability of materials that you know you use all the time in the industry,” she said.
An example provided by Taraschi spoke to another benefit that kind of thinking can provide: avoiding paying premium prices for the items you need. He cited an example of a client building a bridge in New Jersey. Looking ahead, the company purchased most – but not all – of the steel needed for the project when it was awarded the contract. Flash forward and today the cost of steel is almost 300% higher than it was when they purchased the initial load, Taraschi said. According to him, that issue affects all areas of the construction industry.
Another way to plan ahead, and work toward mutually beneficial outcomes, is in the contract process.
Taraschi said for existing contracts nobody wins if the situation does not work. For contracts you’re entering now, though, there are a couple things that you can do to combat pricing, supply chain and delivery issues and it all comes down to sharing risk. “You can have a price escalation clause. That’s now getting to be popular,” he explained. You can also build time into the contract for supply chain issues so that disruptions are “an excusable delay.”
“It’s all about sharing risk because … it benefits both parties to share the risk because if the owner takes a hard line now at the contract drafting stage that the contractor is going to bear that risk, what’s going to happen is every contractor is going to come to that owner with a very, very high price. So the owner is going to be paying one way or the other,” Taraschi said.
Lombardo echoed the idea of working together for mutually beneficial outcomes, suggesting that getting everyone involved in the process as early as possible can help. Having design professionals involved could assist with coming up with alternative materials or methods for getting work done. Bohler agreed, saying that some people are bringing contractors on a little earlier in the process these days, which benefits the design team as well as the developer.
And all that is in the interest of what everyone wants, especially when it comes to upgrading critical infrastructure in the state: getting the work done, according to Gibbs. She cited state legislation that allows for design build project delivery.
“Especially now with what is happening with the supply chain and price escalation, it makes more sense than ever to use this new procurement tool in order to move public projects forward as well as on the private side,” she said.