Supply Chain Issues and Impacts on Builders: What Caused These Shortages and What are Potential Solutions? by Lindsey Smith
Supply Chain Issues and Impacts on Builders: What Caused These Shortages and What Are Potential Solutions?
by Lindsey Smith
Recently, the home building industry has been impacted by construction material shortages and price increases. A 2020 report from the United States Chamber of Commerce indicated 71% of contractors were facing at least one material shortage.1 Lumber shortages are a particularly major issue nationwide.2 According to the National Association of Home Builders (NAHB), more than 90% of builders reported shortages of framing lumber, appliances, engineered wood and plywood, and 87% cited shortages of windows and doors.3 Steel and electrical supplies have faced steep price increases as well.4 Since May 2020, the cost of steel mill products has risen over 75%, including a 59.4% increase in 2021 alone.5 These increasing costs are passed from supplier to the builders and contractors, and ultimately, to the consumers.6 According to the NAHB, the average price of a newly constructed single-family home has increased by about $36,000 since April 2020, and the price per thousand square feet went from $350 to over $1,400 in May 2021.7 As of August 2021, the spot price for lumber was still very high at nearly $1,005 per 1,000 square feet.8 There has been an increase in litigation over new home sale contracts because of supply chain issues. Soaring construction costs have impeded contractors’ ability to perform building contracts for the originally agreed-upon price.9 Additionally, due to increased construction costs, some builders are hiking up contract prices, often relying on price escalation clauses, and using no-cause termination clauses to cancel contracts when buyers are unable to pay the new, increased costs.10
So how did we get here? Simply put - the COVID-19 pandemic caused supply chain interruptions across industries due to government shutdowns, production cuts, and labor shortages.11 The pandemic hit the lumber industry hard with approximately 6,000 jobs lost as a result.12 This loss of labor caused many mills shut down last spring.13 Some factories, like many of those producing lumber in Texas, are still not back in production.14 Another cause of construction cost increases is the industry’s heavy reliance on the global supply chain, which makes it particularly sensitive to external effects.15 Some manufacturers rely on products and parts from overseas, and shipping costs for containers from China to the east coast of the United States have climbed more than 500% from one year ago. 16 Another cause of price increases is the pandemic-caused bullwhip effect on lumber: builders started to fear a shortage, they stocked up, it exacerbated the shortage, prices went up, then manufacturers ramped up production.17 Combine all of these factors with high consumer demand for bigger homes, more remodeling, and new construction, and the result is shortage and price increase.18 Clearly, multiple factors have led to the issues in the building supply chain and despite the pandemic improving, now port bottlenecks in Southern California could compound some of these problems further.19 Industrial and logistics experts say labor shortages and other supply chain issues could last well into 2022 and possibly early 2023.20
Just as there are many causes that led to the construction supply chain issues, there are many potential solutions to them. One short term solution to shortages and delays is substitution; many builders and contractors are searching for substitute materials and alternative suppliers.21 For example, redwood and cedar are relatively affordable alternatives when other types of wood are unavailable.22 However, finding alternative suppliers is proving difficult. According to the United States Census Bureau’s Small Business Pulse Survey, 32.6% of respondents are having difficulty finding alternative domestic suppliers, while 10.6% are struggling to find alternative foreign suppliers.23 Another area that the construction industry needs to improve on is better transparency and differentiating between user demand and actual consumption.24 This is crucial in preventing another bullwhip effect like the one that resulted from the pandemic.25 In an effort to solve the labor shortage problem, manufacturers are investing more in labor. Some have started to offer higher wages and even sign-on bonuses so they can attract and keep workers.26 However, there is a risk that increase in labor costs could constrain market growth.27 Alternatively, some companies are experimenting with robotics to create more automation in the process.28 One potential long-term solution would be decreasing reliance on overseas suppliers. Many companies are beginning to have second thoughts about total reliance on a single overseas supplier and will be bringing offshore production back to the United States over the next several years.29 This is an ideal solution since local sourcing can provide resiliency and security of supply.30
1 Isaac Barzo, Construction Pulse June 2021: Supply Chain Struggles Continue to Plague the Industry, Levelset, https://www.levelset.com/news/construction-pulse-june-2021/ (last updated Jul. 30, 2021).
3 Lydia O’Neal, Builders Hunt for Alternatives to Materials in Short Supply, The Wall Street Journal (Oct. 6, 2021, 5:30 AM), https://www.wsj.com/articles/builders-hunt-for-alternatives-to-materials-in-short-supply-11633512601.
4 Barzo, supra note 1.
5 Katharine A. Dennis & Timothy Fazio, Pandemic Demand Causes Unprecedented Building Supply Shortage, The National Law Review (Aug. 2, 2021), https://www.natlawreview.com/article/pandemic-demand-causes-unprecedented-building-supply-shortage.
8 Samuel Votaw, Will Lumber Prices Normalize in 2021? Don’t Hold Your Breath, Levelset, https://www.levelset.com/news/when-will-lumber-prices-normalize/ (last updated Aug. 5, 2021).
9 Dennis & Fazio, supra note 5.
12 Tim Glaze, Supply Chain Issues Still Stymieing Homebuilders, Housingwire.com (Feb. 18, 2021, 4:05 PM), https://www.housingwire.com/articles/supply-chain-issues-still-stymieing-homebuilders/.
14 Jennifer Castenson, Time and Time Again, Solving Supply Chain Issues Circles Back to One Thing, Forbes (Sep. 27, 2021, 7:15 AM), https://www.forbes.com/sites/jennifercastenson/2021/09/27/time-and-time-again-solving-supply-chain-issues-circles-back-to-one-thing/?sh=530901a65208.
15 Eric Collin, Industry Challenges and Trends: The Construction Supply Chain, Tampa Bay Business Journal (Apr. 9, 2021), https://www.bizjournals.com/tampabay/news/2021/04/09/industry-challenges-construction-supply-chain.html.
16 Castenson, supra note 14.
18 Dennis & Fazio, supra note 5.
19 Gail Kalinoski, How the Supply Chain Crisis Impacts Industrial Real Estate, Commercial Property Executive (Oct. 20, 2021), https://www.commercialsearch.com/news/how-the-supply-chain-crisis-impacts-industrial-real-estate/.
21 O’Neal, supra note 3.
22 Barzo, supra note 1.
24 Castenson, supra note 14.
29 Kalinoski, supra note 19.
30 Castenson, supra note 14.