Jan 09 Shipping Delays and Supply Chain Issues Are Still Prevalent. Where Can We Go From Here?
In the wake of the COVID pandemic lockdowns, getting back to normal—whatever that means anymore—has proven to be a different kind of challenge for every industry. But while some industries grapple with sky-high energy costs and others face labor shortages and shifting consumer habits, just about every industry that relies on predictable, consistent supply shipments is finding itself at the mercy of the supply chain.
Put simply, we’re still dealing with shipping delays that are not expected to resolve anytime soon. These stem from a variety of factors: extreme weather, shifting consumer demand, labor shortages, energy costs, and geopolitical challenges. We’re not going to rehash what you already know—instead, we’re going to focus on what the current supply chain situation means for the construction industry moving forward.
Construction Companies Need to Plan Ahead
It sounds obvious, but it’s more crucial than ever that you plan ahead for upcoming projects as you order supplies and secure subcontracts. Your suppliers are your collaborators—when they know what’s on your docket and what you’re going to need to complete each of those projects, they’re better equipped to get the supplies you need to you in a timeframe that fits your project. This enables them to get ahead of any shipping challenges they might face and potentially avoid those delays altogether, keeping you on track and your clients satisfied.
Get a Grip on Cash Flow
Planning ahead may now involve fronting costs earlier than historically needed for your business. Instead of purchasing job materials and supplies 2-3 months prior to a job start, you could now be looking at 4-6 months of holding time. To further the impact, not only would you be floating those costs for longer periods, but most likely at higher prices given the increased rates and limited availability. Cash has always been key in the construction industry, but now more than ever it will involve more planning and strategy to maintain your company’s cash flow.
Metal Markets are Feeling the Impact
In 2022’s economic climate, metal markets have been particularly unpredictable. There are a few reasons for this, including:
- China’s zero-COVID policy
- Weaker demand from Chinese manufacturers
- Fears of a global recession
Unpredictable metal prices have a ripple effect on other industries, including the construction industry. Copper prices in particular have spiked in recent years, putting electrical contractors at a disadvantage. They, as well as contractors in other fields, have seen this impact their cash flow and have been forced to increase their prices. Many contractors have found themselves struggling to increase or escalate the costs listed in their contracts to match market pricing.
Certain supply chain issues, like a reduced workforce due to pandemic restrictions, are resolving as people head back to work. But record numbers of workers chose to retire early because of the COVID pandemic, and now the logistics industry is seeing a gap between the number of people who’ve left the field and the number of people seeking to enter it.
You might have encountered this same challenge in your company. Simply put, there are fewer skilled workers entering the construction industry than there are exiting it. As you adapt your processes to work with this labor trend, know that adjacent businesses, like suppliers and importers, are grappling with the same challenge.
The Infrastructure Investment and Jobs Act
On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law. This legislation, meant to update the country’s outdated and rundown roads, bridges, railroads, public transit, energy and water infrastructure with $550 billion in federal funding, largely had an adverse effect on contractors who pick up federally funded projects.
Here’s why: the Act requires that all materials used in these construction projects contain at least 55 percent domestic content and that all materials used be produced in the United States.
Additionally, contracts are “strongly encouraged” to have project labor agreements in place for projects costing more than $35 million.
Materials sourcing requirements can make projects more expensive and take longer to complete. Recognizing this, legislators included the option for construction firms to waive this requirement in the Act’s language. Issues like a lack of materials’ domestic availability, poor domestic quality, and high domestic cost can make it inevitable that firms will need to source materials from outside the US, and this could be complicated by foreign trade practices and friction regarding the public’s perception and interest in these projects.
The bottom line is the construction industry is facing more than just supply shortages; many contractors are also facing logistical and compliance-related difficulties. Companies who pick up federally funded projects are urged to carefully read, understand and consider the requirements included in the Infrastructure Investment and Jobs Act because failure to do so can mean big profit losses.
Sax Can Help.
At Sax LLP, our role is to empower you to make the best financial decisions for your construction business. The best course of action for one business isn’t the same as another—your goals are unique, your business model is unique, your assets are unique, and your needs are unique. We look at all of that when we assess your business’s needs and develop effective strategies for you.
Tyler Goodspeed, CPA is a Tax Manager in Sax’s Construction Practice who specializes in multi-state tax engagements within construction, real estate, and manufacturing companies. He assists in tax planning for corporations, S-Corps, and partnerships, as well as individual planning. Tyler also plays a role in training and development for staff. He can be reached at [email protected].