"Just when I thought I was out...They dragged me back in!"
(The Godfather)
That is a quote from the movie The Godfather that I also heard from a contractor trying to deal with the whipsaw starts and stops torturing post-pandemic construction markets.
The Contractor Said:
"Biden gets elected and dangles a $3.5 trillion "build back better" infrastructure rebuild in front of me and my marketers. We go nuts in our marketing department with estimators cranking out bigger and better bids as we try to get in on the coming infrastructure boom. Optimism abounds...
Then my VP of Operations starts reporting work slowdowns because we can't get enough tradesmen to maintain the pace of the work...
I get aggressive with my HR department and while trying to hire the workers we need, one of the HR staff quits; saying I’m creating a "toxic " work environment...
Suddenly lumber triples and we can't get copper or PVC pipe at any price. Now what?!
Supply chain problems. Ports of entry are overflowing with more than 500K containers because there are not enough truckers to haul them away...
More than 70 container ships are anchored off Long Beach, California waiting to unload and, wouldn't you know, one of their anchors snags an offshore oil pipeline and fouls the beaches south of LA...
The Long Beach port alone is on pace to process more than 9 million container units this year, exceeding last year’s record of 8.1 million units, the most in the port’s 110-year history. Who's buying all that stuff? And where is everybody getting the money if nobody wants to work? Doesn't anybody need to get paid anymore? No tradesmen. No truckers. Where do we go from here??"
Contractors Remain Optimistic However…
"Then I read that the good news is supposed to be that demand for construction services remains elevated... Despite all the challenges facing the nonresidential construction industry, contractors collectively expect sales, staffing and profit margins to expand over the next six months, although the level of confidence has been diminished in recent months.”
Our Contractor Begs to Differ:
"Diminished in recent months?!!" this contractor wailed. "Diminished, you say? Contractors never seem to admit that a downturn is coming. They always look to a better future. That's the only way we can stay positive in this crazy business. But we have never lived through a post-pandemic market. This roller coaster ride is a nightmare and I don’t see anything to be optimistic about."
The Law of Post-Pandemic Inflation
ELEVATED DEMAND + DECREASED SUPPLY CHAIN WORKFORCE = CLUTTERED AND CLOGGED SUPPLY ROUTES (resulting in) MATERIAL SHORTAGES AND HIGH PRICES AT THE POINT OF SALE.
In other words, the labor shortage exacerbated by the pandemic (both on the jobs and in the supply chain) and the increase in pandemic pent-up demand has caused an already fragile supply chain to clog and sputter at various critical junctures leading to shortages in supplies resulting in elevated prices to the end user. Or to put it simply:
DEMAND UP + SUPPLY DOWN = PRICES UP (Inflation) AND PROFITS IN JEOPARDY
In the construction marketplace, post-pandemic inflation is causing both a shortage of labor and a shortage of materials. These shortages are causing work to slow down thereby slowing the completion of projects and causing a shortage of contractors with enough available resources to accurately bid on and produce new projects. Even if demand in the construction marketplace stays steady, there are fewer tradesmen to fill the need. Owners will experience elevated bids and extended times to completion. They will cut back on RFPs waiting for the marketplace to stabilize. Demand will wane and the cost of labor and materials will continue to rise until the supply chain is unclogged and workers need money.
(Anyone who would like to predict how long that cycle will take is free to email me at tom@schleifer.com.
Schleifer's Law
CONTRACTORS THRIVE DURING STABLE MARKETS
Contracting requires too much lead time to manage the euphoria of expanding markets or the contraction of shrinking markets. Seventy years of data support the conclusion that most of the profits in contracting are earned during stable market periods and given back in both expanding or contracting markets.
The whipsaw post-pandemic market we are now experiencing can be called many things, but not “stable”. Keeping The Godfather in mind, thoughtful contractors should replace the optimism being reported with caution because, as this contractor said to me;
"Just when I thought I was out...They dragged me back in!"