How Increased Material Costs And Lead Times Have Impacted The Way General Contractors Conduct Business

Since 2020, CRE construction has witnessed unprecedented materials pricing escalations and excessive lead times, accentuated by rising interest rates, record-high inflation and labor shortages. From 2020 to 2021, materials costs increased overall by nearly 20%.

As of May 2022, overall construction materials costs escalated by almost 52%, with some materials like diesel fuel increasing 400% from 2020. 

While materials costs are expected to cool off as 2023 continues, uncertainty still plagues the industry, increasing the need for reliable general contractors who can work in a timely and effective manner. For Renaissance Construction, an Arizona-based general contractor, adapting to tough market conditions is nothing new.

“What we've seen is that the constraint of capital has influenced more developers to sit on the sidelines and observe what the market does,” Vice President David Tilson said. “Lenders are also becoming stricter with where they put their money because the market is very unpredictable right now.”

Founded in 1991, Renaissance Construction specializes in general contracting, design-assist and design-build projects for both ground-up and tenant improvement projects. The firm works in the industrial, retail, hospitality, healthcare and office spaces across the state.

Renaissance Executive Vice President of Corporate Communications Chelsea Porter said in the Phoenix market, materials costs are particularly stressed due to the vast amount of developers coming from out-of-state and multibillion-dollar semiconductor projects absorbing much of the concrete and steel supply in the area.

“Phoenix has been a microbubble within the larger construction market,” Porter said. “There’s companies from all over the world working on multibillion-dollar projects in the area, including Taiwan Semiconductor Manufacturing Co. constructing two chip plants. While these projects will ultimately benefit the region, they are creating continued stress when it comes to construction material supply, labor and cost.”

Tilson said since the beginning of the pandemic, lead times have also increased considerably. At one point, the firm said it experienced a wait time of 16 months for joists — a material necessary for the framing of a structure.

Meanwhile, other supply costs simultaneously crept up in price, including electrical parts and panelized roofing material. In Phoenix, roofing subpanels are roughly eight to 12 weeks out, and some of the larger components needed for electrical systems are about a year out, said Senior Estimator at Renaissance Brett Eklund. Roof-mounted air conditioning units are still seeing lead times of up to 30 weeks, he said.

While this may not seem like a long time to wait for new construction, it’s a different story for tenant improvement projects, Eklund said.

“Issues start to arise when tenants want to move their operations into a building, and they can’t because you’re not going to have air conditioning, even though every other aspect of the project is already completed,” Eklund said. 

To alleviate some of the pressure that the market is feeling from lead times and material costs, Renaissance focuses on two strategies for its developers: speed-to-market and value engineering.

Porter said that the firm saw an immediate post-pandemic shift with its owners, who expect speed-to-market in getting their projects planned and approved as quickly as possible to avoid pricing and materials setbacks. 

“Renaissance adjusted its strategy to accommodate this shift in the market by asking owners to complete structural plans with long lead times as quickly as possible, such as structural and electrical, so it would give us the opportunity to get a spot in line to acquire roofing, lumber or electrical gear more quickly,” she said.

Owners that opted for the traditional design-bid-build process found their project schedules heavily impacted by hefty lead times for materials and subcontractors' crew availability.

In many design-bid-build cases, Renaissance was able to convince owners that it was more efficient and cost-effective to wait for the delayed delivery dates and adjust their start time based on that, Manager of Construction Technology David Mettler said. Companies always want to get things moving, but in this market, that isn’t a cost-effective solution for design-bid-build.

Mettler said that the firm is also seeing a pattern where contractors are looking at how to change the materials they use for construction, furthering the importance of value engineering in today’s market. 

As the market starts to emerge from pandemic-induced supply chain issues, contract protection will be a key strategy to ensure that his firm remains competitive in the market, Mettler said. 

He added that before the pandemic, construction contracts often did not consider force majeure — or an uncontrollable circumstance — affecting the speed or price at which a project was produced. Going forward, there are several factors that contractors should consider to remain vigilant in the market.

“One of the things that has occurred in our contracts is that with the owner, we can negotiate a particular guaranteed maximum price with an allowable percentage increase,” Mettler said. “That way, we’re protected and the owner and lender are protected as well.”

Tilson said that many owners have asked Renaissance to increase their contingencies from 1% to 3% or add an escalation line cost to prevent the lenders from asking questions and potentially losing financing — because they cannot account for any unexpected costs of that magnitude. 

“Escalation, liquidated damages and force majeure clauses will be important not only for Renaissance moving forward, but for many other general contractors in the industry,” Tilson said. “These two key clauses influence factors such as lead time and scheduling. As we move forward, Renaissance is taking extra precautions to protect itself and its clients during turbulent economic times.”

This article was produced in collaboration between Renaissance Construction and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.