While industrial development is booming, the construction industry has faced its fair share of headaches and setbacks over the last 18 months with material shortages, volatile pricing, and competition for skilled labor. Lengthy lead times for crucial construction components such as steel, insulation, precast concrete and more, have been major challenges this year, and will continue to be so for the coming months.
But when in a pinch, general contractors have to do more than put on their thinking caps — the pandemic-related supply chain issues and runaway costs have forced the industry to innovate and become resourceful in an era when time is more precious than ever. Whether it’s sourcing different materials or diversifying the project pipeline, there are many different strategies firms are taking to complete a job and keep the books in the black.
It’s likely to take at least another couple of quarters, or longer, until the supply chain gets fully sorted out and caught back up to pre-pandemic lead times, but until then, Chicago-area construction firms are proving themselves able to push ahead despite the ongoing pandemic conditions and the disruptions caused by it.
Flexibility and adaptability goes beyond the blueprint
There’s simply no way around the fact that steel and precast concrete lead times are challenging the construction industry as a whole. And the material shortages go even deeper as other pieces to the proverbial puzzle become more scarce. But the longer it takes to obtain materials, the harder it is to predict the total costs and timeline for construction.
“They’re both culprits right now,” Mark Augustyn, co-founder and COO of Principle Construction, says about the steel and precast shortage. “Steel is about 40 weeks out, which is an extraordinary time period as it used to be 14 to 16 weeks, while precast can be 40 to 52 weeks out.”
The Rosemont-based builder frequently takes on industrial developments and has had to face the long delays for materials like every other general contractor in the area. But construction crews are bracing for additional shortages and fluctuating prices on these much-needed materials. Even roofing materials have now been added to the list of high-demand and short-supply items, Augustyn explains.
“We’re currently experiencing a shortage of just about anything that goes into our roof, whether it’s the insulation, or the membrane, or even something as simple as the adhesives that are needed,” Augustyn says of the situation. “The bottom line is we’ve got a strong demand and we’re now bumping up against the availability of the product.”
One solution may be changing the order in which the membrane is installed, or perhaps a different solution could be going with another, more readily-available material. But in other cases, builders may have to take an entirely different approach towards the construction, particularly for an industrial owner who is prioritizing speed above all.
“In our industry, we’ve been [constructing buildings] the same way over and over and making small innovations as we go. Now, because of some of these shortages, we have to go back to the way we built the assemblies and say, hey, maybe we can get a dual purpose out of this particular feature of our roof while we wait for the installation to show up,” he explains.
Some materials can serve double-duty, other materials could be sourced elsewhere or salvaged, and then in some extreme cases, builders can look back to previous methods of construction in order to get a job done as quickly and efficiently as possible.
“What we have to do is say, okay, well how can we build this building and take some of these long leads and or cost items out of the equation? How else can we solve the problem,” Augustyn says. “We stopped building with masonry bearing walls only 20 years ago as the predominant form of our industrial walls, so what if we go with a different wall system and eliminate precast?”
Sorting out the challenges to a building ultimately comes down to what each individual client needs, how much they’re willing to spend and their time to completion target. But at the end of it all, “customers are always looking for delivery,” Augustyn says in a no-nonsense manner.
“I think we’re going to continue to plan to build our buildings in the industrial market as we’ve always done, but so much is dependent on the specific needs of the customer. So we will continue to have to innovate, and come up with solutions on how we can accommodate the needs of our customers.”
Foresight as a strategy to mitigate catastrophe
It’s virtually impossible to predict what steel prices and lead times will be six months from now. And it’s also difficult to predict exactly what kind of effects a second wave of business closures and stay-at-home orders will have on the economy and workforce. But one thing construction companies can do is plan ahead by obtaining work that will move forward regardless.
For instance, before the pandemic even hit, executives at Pepper Construction were wondering when the next possible economic dip would come and were preparing for it by lining up government and education jobs, says Jake Pepper, Executive Vice President with Pepper Construction. By doing so, the company’s pipeline remained steady through 2020 even as other companies took a pause.
“We just knew that the cycle that began in 2011-2012 was getting pretty long in the tooth and believed that there might be a slowdown but had no idea what was going to cause it,” Pepper says. “So booking that bond-financed K through 12 work was something that we very much targeted and we won three giant school districts.”
The districts that the company engaged, and won, in the lead up to the pandemic included Maine Township, Oak Park and River Forest, and Hinsdale, Pepper says. Later on, Pepper also took on Rich Township in the south suburbs. These contracts added up to $350 million to $400 million of revenue over a period of four years, giving Pepper Construction some much-needed breathing room to focus on getting through the pandemic-fueled recession.
“You look at 2008 or 2009 and financing dried up, so projects disappeared because they couldn’t get financing,” Pepper explains. “During COVID, not a lot of projects disappeared but a lot of them went pencils down, and it wasn’t about money, it was the uncertainty of what was going to happen.”
Lining up a diversified project pipeline and keeping a steady flow of income in the lead up to the pandemic meant that Pepper Construction was also able to keep its teams together through the toughest months. And by not making any major changes to staffing, it better served the company to take new projects head on as COVID cases eased up and state started reopening.
“I think we gained a lot of credibility with our employees by committing to avoid layoffs. We’re a family-owned company, so we take a long term perspective and it would be really hard to lay everybody off just to have to go find that talent again,” Pepper says of the company’s staffing strategy.
During the pandemic, Stan Pepper, Pepper Construction’s CEO and Jake Pepper’s father, would host weekly town hall meetings over Zoom to keep employees engaged and to answer questions from staff and dispel any concerns. Ultimately, the company came out of 2020 with solid footing and are now bringing on new teams to take on a growing pipeline of jobs in Indiana and Ohio.
“We missed our revenue targets in 2020 but we did better than maybe what we had expected and I think we’re in a good position. Now, we still have to hire [staff] and have been hiring in Ohio and Indiana because they never really slowed down through COVID — they actually got busier,” Jake Pepper says of the company’s current situation.
Pepper adds that there were of course other key themes that worked in the construction industry’s favor, particularly the fact that construction was deemed an essential service and jobs were able to carry on even during the bleakest periods of the pandemic, “because if the revenue spigot turned off, then we would have serious issues.”
In the end, Pepper says that he and his team didn’t miss a beat. But ultimately, it was a combination of adapting to the pandemic conditions through virtual work for office staff and mitigation efforts at job sites as well as an emphasis on strategic foresight that allowed the company to continue operating full steam ahead throughout 2020.
“We’ve done some business resiliency planning before COVID, obviously not knowing there was going to be a pandemic, and that that really benefited us going through that,” Pepper says of the situation. “Every one of our competitors that we know have laid people off or did multiple rounds of layoffs and the fact that we were able to commit and follow through on not laying anybody off was great and we really gained a lot of trust from our employees through that process.”
This article also appears in the August 2021 issue of Illinois Real Estate Journal