Below is an excerpt of an article published in Construction Executive on September 9, 2021.
The prices of raw building materials have risen dramatically over the past year, primarily because of the global pandemic and trade policies implemented by the previous administration, thereby jeopardizing construction projects that did not mitigate the risks of material price escalation.
Material price escalation is not new to the construction industry, which has experienced historic periods of price escalation known as commodities supercycles, often referred to as periods of time when commodity prices rise above their long-term trends for at least 10 years followed by a downturn of similar duration until supply meets demand. The industrialization of the United States in the late nineteenth century, the post-war reconstruction of Europe and Japan in the 1950s, the oil embargos of the 1970s and the industrialization of emerging nations such as China in the early 2000s are identified as commodities supercycles.
Over the past few months, commodities traders and economists have debated whether a new commodities supercycle is underway as raw material prices continue to rise. The Producer Price Index for July 2021 published by the U.S. Department of Labor, Bureau of Statistics, reported for the 12 months ended in July on an unadjusted basis, that the final demand index increased 7.8%, the largest advance since such data was first calculated in November 2010 and that the final demand index less foods, energy and trade services rose 6.1%, the largest increase since such data was first calculated in August 2014.1
Over the past 12 months ended in July, the price of natural gas is up 146.7%, steel mill products are up 108.6% and crude petroleum and unprocessed energy materials are up 102.9% and 93.8%, respectively. The price of softwood lumber is now up 45.0% after decreasing significantly over the past two months.
While history and the market dictate that prices will eventually come down, it is unclear when or if they will not continue to rise as did the price of copper when it quintupled from 2000 to early 2011. Accordingly, it is in the best interests of all stakeholders – owners, contractors, subcontractors and suppliers – to mitigate risks associated with material price escalation on construction projects. Read the article.