Building in Chaos 2.0

In this episode, we’re diving deep into our supply chain and learning about how it’s shaping the development of water and wastewater projects.

We’ve brought in two of our favorite industry insiders: Mack and Justin. These guys have shared their construction stories with us for the past three seasons. Mack Harmon hails from Ferguson Waterworks, while Justin Jones is a pre-construction engineer with Harper General Contractors.

Summary

Topic #1: Price negotiations and influx of federal funding

• Contractors are facing debates with suppliers or subcontractors after winning a job
• Suppliers may increase prices, and some contractors are willing to lose the job instead of agreeing to pay more
• Massive influx of federal projects, including conceptual ones not yet on the market
• Impacts on cost, lead times, and industry may not be fully prepared

Topic #2: Construction materials and electrical orders

• Lead times for certain materials are back to normal, but prices are still high
• Electrical orders have seen a massive increase, with prices and lead times continuously extending
• Some materials may become problematic with an influx of orders
• Looking into design-build projects instead of hard bids is a solution
• Being flexible and allowing the contractor to work on the project as plans are finished is best

Topic #3: Changes in the supply chain

• Vendors are no longer holding orders or pricing for extended periods of time, requiring more preparation before placing orders
• Changes in the supply chain are likely to be permanent
• Challenges in procuring materials due to municipalities sticking to traditional fitting and connection types

Topic #4: Challenges with the abundance of funding and opportunities in the industry

• Fewer bidders on jobs, making it harder to see if a bid is competitive
• Contractors may already be too busy with current projects, leading to the possibility of zero bids
• Delay in a project due to supply chain issues causing delays for critical items
• Relationship between suppliers and contractors requires more communication to solve issues
• Lack of bidders for smaller projects, particularly those that are more difficult

Topic #5: Avoiding delays and contingency plans

• It’s important to have equipment on hand, but sometimes having that equipment won’t prevent delays
• Open communication between contractors, engineers, owners, and suppliers is crucial
• Delaying a project start date may not be a solution and can escalate costs
• Having contingency plans in place is crucial to avoid surprises and prepare for any scenario.

Transcript

Justin [00:00:00]:You know, we show up to a great job with clear plans and specs, and there’s one, maybe two bidders on the job.

Mack [00:00:07]:You know, if you need material and you put in a new order, there’s no expediting. You’re still probably 30 weeks. Hey there.

Robert [00:00:14]:Welcome to the Outfall, your go to podcast for those one of a kind back stories of our water and infrastructure world. I’m your host, Robert, and today we’re diving into our supply chain and learning about how it’s shaping construction projects. Now, we’ve brought in two of our favorite industry insiders, mac and Justin. You know these guys. These guys have been sharing their construction stories with us for the past three seasons.

Mack [00:00:48]:Boy, was I wrong.

Justin [00:00:50]:Right out of the gate, he’s firing you with that.

Robert [00:00:53]:You’re like, I thought this was an easy podcast.

Robert [00:00:56]:Mac Harmon hails from Ferguson Waterworks, while Justin Jones is a preconstruction engineer with Harper General Construction. Not only will we be getting the inside scoop on what’s happening right now, but we’ll also be tapping into their expertise to gain insights into the future of construction in the upcoming year. This is going to be fun. Let’s jump in and start with Justin.

Justin [00:01:20]: Last year, obviously, we’re coming off the year of chaos and kind of have this feeling that things were going to start to settle out and really go back closer to normal. And what I’ve seen is you’re seeing lead times go back to normal for certain items like pipe metals, concrete, rebar, that kind of stuff. So lead times are back to normal, but the prices for those are still as high as they were a year ago because with the projects out there and all the work on the horizon, there’s so much demand that there’s no need for any suppliers to drop their price because people are still buying. So from a lead time standpoint, we’re getting better in certain areas, but cost is staying the same. The only exception to that that I would say is electrical. We’ve seen a massive increase in electrical orders for transformers, VFDs, motors, drives, anything like that, and their prices are continuing to go up and their lead times are continuously extending. So that’s the one that hasn’t settled down since a year ago. Today it’s really electrical that’s still continuing to go up in both cost and lead time.

Robert [00:02:34]:I mean, when you say go up, is that 5% to 10%? What’s the general?

Justin [00:02:39]: I would say honestly, for certain items, transformers and drives specifically are probably going up 15% to 20% in cost per year. And it’s probably about the same or if not higher, percentage of lead time increase. I’ll just give you a quick example. I’m getting transformer lead times right now that are 118 weeks out. We’re not even talking weeks anymore. Now let’s just go to years and we’re at two years before we could get a transformer. So prediction wise, I don’t see that changing right now because there’s still so many orders being placed. And it’s just the companies like Eaton and Schneider and GE, they’re all just trying to play catch up now. And with the orders continuously coming in, I don’t know if they can catch up like what we’ve seen from the pipe suppliers.

Robert [00:03:30]:All right, Mac, what have you noticed or seen this past year?

Mack [00:03:34]:It has gotten better, I think. Last time we talked, we talked about what’s your predictions right, what’s the end of the year look like. And we all hoped we’d see some improvement. And we have, especially in certain markets, PVC, plastic, virtually that material is available. The ductal market, which especially in the upstate of South Carolina, we’re a heavy ductal market. There’s still a lot of backlog, there’s still a lot of uncertainty in lead times. It’s not as unforgiving and unpredictable as it was a year ago, but it is still significant. There’s still a lot of order management taking place to prioritize.

Justin [00:04:12]:

Right.

Mack [00:04:12]: If material is available, who actually needs it and where does it need to go. I think there’s two main areas on the utility side of things that we still see a lot of issues with, and ductal being one of them. While it is more available, there is still lead times involved and a little bit of unpredictability about availability and then brass material. And not necessarily import threaded brass fittings, but like corporation stops, curb stops, meter setters, you’re still seeing pretty significant lead times with no leeway and no workaround. If you need material and you put in a new order, there’s no expediting. You’re still probably 30 weeks, something like that. And where that’s impacted the most is these municipalities. And we were talking about rural water, and a lot of these municipalities all have their own specifications and materials they want to use. And if you have a new subdivision that has 100 and 5200, 300, 500 new homes that all need new setters, the project will be done and you won’t have the brass to put the meter in.

Robert [00:05:12]:So what happens then?

Mack [00:05:15]: You wait. I mean, in all honesty, it’s still that waiting game. There’s nowhere else to there’s lots of conversations that we have about trying to bring alternatives that may be available. Maybe it’s just a slightly different style, slightly different connection that, hey, if you will go this route, then we can get it for you. We do have the availability, but these municipalities stock up materials for what they’re used to using and what they’ve been using for years. And they don’t necessarily want to change their fitting and connection types because they’ve always done it a certain way. And if you’re not willing to change, then you wait. But from a pricing standpoint, I’d agree with Justin too. While availability has gotten much better, I mean, it’s not as much of a heartache. There is still a lot of communication that has to take place between contractor and distributor and across all facets, not just the utility side, as Justin mentioned, electrical and what he’s dealing with, but the pricing has not gone down at all. And just when I think that I’m confident in giving a price for a project, and we’re not going to see any increases, we’ll see an immediate increase that in the past vendors, if you had an order open and you had an increase, they weren’t necessarily impacting your orders that were already in place. But I feel like that’s going out the window. Even with availability still there. These vendors like the fact that if they have an increase, they’re going to do it for everything they ship, and that really hasn’t come back around.

Robert [00:06:35]: All right, so when is it going to come back around?

Mack [00:06:38]: Well, that’s the question of demand. I think that some things have changed that will be very hard to go back. Like what? Over the past three years, like price negotiations, holding pricing, not shipping material, used to be able to put an order in, and it could be a year down the road. It’s available immediately, but you don’t need it for a year. So when you need it, you say ship it, and there’s really no questions asked. That sort of went out the window probably three years ago, two and a half years ago, and it hasn’t come back. Vendors are not holding orders, and they’re not holding pricing for extended periods of time, especially through price increases. So there’s still a lot of preparation that has to be involved with that. And even if they may be able to, and I don’t know I don’t know what’s all involved in their supply chain, but even if they are able to potentially hold a price, I think there’s a little bit of, hey, we like the fact that we don’t have to hold it anymore, and we don’t want to go back to that. So I think there are certain things that have changed in the craziness of there was COVID, but also the supply chain issues that really changed the way that a lot of vendors and manufacturers and distributors and contractors work that will probably be a permanent fixture moving forward for the foreseeable future.

Justin [00:07:49]:

Yeah, let me piggyback on that. From the contractor standpoint, there’s more debates than we’ve ever had before where we’re getting suppliers or subcontractors. And this is not picking on Mac. This is in general, across the board, where after we win a job, let’s say we win a Hardbit job, they come back and say, hey, our price went up since we gave you that number. We’re still within the timeline of when that price was valid for, but they say, hey, we need more money for this job, and it’s, well, okay, we’ll just take the job away from you because you told us it was good until this date. And the response is, instead of, okay, we’ll hold our price, it’s okay, then take the job away. It’s almost like people are willing to lose a job now over cost increases because there’s so much work still out there. And that’s something that, personally, I don’t see changing anytime soon. With all this money coming out from the federal government, you’re going to see a massive influx in projects. A lot of the money is already dedicated to jobs that are maybe in the preconstruction phase or in the design phase, but a lot of them are probably conceptual projects that have pers out, haven’t even hit the market from a material and contractor ability to build standpoint. And that’s all going to come down the line at the end of the month when they decide where this funding is and where it’s going to go in April, May. I think we’re going to see a massive influx of projects that could have a big effect on what you’re currently tracking. Mac on both cost and lead times. And that’s the thing that I don’t know if we’re as an economy, as an industry, fully prepared for yet, or understand what the implications are going to be when this funding hits the market.

Mack [00:09:26]:

Yeah, it’s a scary thought. While we have recovered and there has been some recovery on materials and lead times that is very fresh, that is very new. It’s being able to when you call it’s like, hey, do you have this? Actually, we do. When do you want it?

Justin [00:09:41]:

Now.

Mack [00:09:42]:

It’s like, great, that didn’t happen two years ago, it’s happening now, but the recovery is so fresh and so new. If there is a lot of funding and a lot of demand, I think that some of these manufacturers did a lot to try to ramp up their production. You had supply chain issues and you had a lot of money in the market, so you had big demand with tons of supply chain issues that just caused a huge backlog and everybody tried to ramp up production. So hopefully some of the vendors are a little bit more prepared to handle an influx of orders. But I think it’s going to be very interesting to see if we are fully recovered or if we’re sort of in a temporary period where another rush of orders is just going to set everything back again.

Robert [00:10:22]:

Yeah, I liked what I think. Justin, one of you said it was the Year of Chaos last year. If you had to name this year, what would this year be named?

Justin [00:10:31]:

Chaos 2.0. All reality. It is a blessing for our area and us to be in this industry, to receive all this funding and this opportunity for projects. But we’re seeing it on bids where we show up to a great job with clear plans and specs, and there’s one, maybe two bidders on the job. It used to be before all of this started happening and when COVID really started and people needed work, there were three to four bidders on every job. And it’s almost that there’s so much work out there. Contractors are being more selective and in a lot of cases you’re going to get one or two bids, which causes to go back to chaos. 2.0 causes chaos from the bidding standpoint because you’re losing that feel of competitiveness as an owner, even though the number may still be competitive, you can’t see it as easily. And from just an overall standpoint, that means all these contractors working in the area, if they’re not actively pursuing these good jobs, it means they’re full with projects, they’re actively buying stuff, spending money. And I’m interested to see what will happen when some jobs bid where it’s not a great job for any contractor. Do they show up with zero bids? And I don’t know if we’ve seen with billions of dollars coming into the industry, I think that’s a real possibility coming up soon, having zero bids.

Mack [00:11:57]:

Right.

Robert [00:11:57]:

And then what do you do as an owner then?

Justin [00:11:59]:

Yeah, I mean, you’re trying to just convince people you’re calling around and basically selling your project. In the past, projects sold themselves. It’s pretty rare that I would call Mac and say, hey, I really need you to bid this job. Nobody else is bidding it a lot of times there’s a lot of interest almost like that’s changing. Now we’re seeing it where owners may have to start doing that and making a call and say, hey, I really need somebody to bid this job. Can you look at it and find a crew available to do it? Wow.

Robert [00:12:29]:

Justin, you mentioned the transformers being a couple of years out. Right. What happens then? I mean, what do you do if you’re done with the project except for the transfer? I mean, you’re in construction and you.

Justin [00:12:40]:

Have all that, except that honestly the best thing. You can do that kind of equipment as much as you can to try to get ahead of those lead times. That being said, you may still be stuck waiting on a piece of equipment like that. And what’s going to have to happen is just calling contractors, engineers and owners and suppliers even on the supply of the equipment and it’s just discussing what are we going to do if this happens and have a contingency plan for different scenarios that could affect the project. Because the answer is not to say the contractor needs to stay mobilized when there’s nothing to do and you’re just waiting on a delivery because that’s going to cost the contractor money to be on site, ultimately cost the owner money. You also don’t want to just delay project starting to try to meet match up with those long lead items because then you’re delaying getting orders out on all the other equipment and materials that could escalate in that time as well. So it’s really going to be a constant communication piece is key between all parties involved with projects to just discuss what’s happening, talk about contingency and planning options, so that whatever scenario comes up, the discussion has been had. And it’s not a surprise to everybody when there’s a delay or when you can’t give material, because it’s two years out.

Mack [00:13:54]:

And from a supplier standpoint, I got a project with Harper. Not a gigantic project, but it’s one that Harper essentially has a 30 day shutdown window to have all the material done, all the new material installed. Project needs to be completed within 30 days. And there was one valve, 36, week 34 to 36 week lead time on. They’ve got a scheduled shutdown based on when we expect the valve to show up. We were on week 36 when we expected it to show, and a couple of days before week 36, all within a day, it was, oh, actually, no, the lead time changed. We don’t even know what the lead time is on the valve now. And then the lead time changed to actually, we do.

Justin [00:14:35]:

It’s August.

Mack [00:14:36]:

It was supposed to be early March. It’s now late August of 2023. So that is one of those situations where it’s like, what do you do? It came up out of nowhere. I mean, like Justin said, you do try to plan for things like that sometimes. It’s one of those things that there’s still issues out there, right? So you still have some supply chain issues, and all of a sudden, you’ve been waiting 36 weeks for a 30 day shutdown. And there’s one critical item that now you essentially don’t have a date on it. And so that’s the suppliers working with the contractors. Again, we mentioned in the last podcast that that relationship has gotten a lot, been forced to become a lot closer, a lot more communication. And it’s having discussions on the side, not necessarily officially. I talked to Harper, and Harper talks to owners, just kind of Ferguson and Harper talking out, all right, what are our alternatives if we can’t make this work? If we end up not being able to get this vow, can we do this? Can we do that? Are there any other options out there? So you do have to play that options game, but everything Justin said is spot on. I mean, I’ve seen Justin’s in the wastewater and water treatment plant world, but there’s a lot of municipalities out there doing just small upgrades, pipeline upgrades, just line work, storm drain upgrades, and they’re not getting the number of bidders that they used to get. And if it’s a difficult job, there’s no bidders.

Robert [00:15:56]:

All right, put you on the spot. We’re having this conversation this time next year. Somehow I’ve convinced you to come up on board again. What do you think you’ll be talking about next year at this time?

Justin [00:16:06]:

I mean, honestly, with the money coming into the market a year from now, I would expect that we’re having almost the same conversation as we’re having now. Where the answers. Things aren’t solved, there’s not have perfect solutions. There’s going to be problems with certain items. There’s going to be expecting a lead time, expecting it to get delivered, and it doesn’t for one delay or another, I think that’s going to happen. On top of that, I really believe it’s going to be a mad dash, because as we turn into next year, as long as the government holds that December 2026 deadline for this funding starting next this time next year, it’s going to be a mad dash because you’re less than a little over two years to get completed. And some of these projects that are getting funding are two and a half year projects. By this time next year, it’s going to be a blitz from a construction standpoint, a design and approval standpoint to get these projects done and closed out before that sunset on funding in December 2026.

Robert [00:17:13]:

Wow.

Justin [00:17:13]:

All right, Mac.

Mack [00:17:15]:

Well, Justin, I agree with you. I think that this time next year, I think we’re both going to be very busy and be fortunate to be busy. But I think that it’s going to be very interesting to see what products turn into the problem child. I do think there will be certain products, and I could speculate, but I really don’t know. I do feel like a ductile iron pipe. I think ductile iron pipe. If there’s a big influx of orders, they’re not ready to handle that right now. I think that could potentially be an issue, but we’ll be talking about long lead times around them. I think that the best thing that a contractor could do right now or that an owner could do right now, is potentially look at some of the design build side of doing a project, almost more so than a hard bid working with Harper on a design build project. Now, we’ve had materials ordered and are released and planning to deliver to the site before the 100% drawings are finished. And it’s because we know certain items are not going to change, and we have to get those in place so Harper can pour a foundation for the headworks. So when owners are going to have to get more creative and be willing to be flexible and change how they may typically do things, and hard bid may not always be the answer. I think if some of these owners, if they get the money and then they take a year to drag on getting plans completed and put it out for hard bid, they’re going to have a hard it’s going to be very difficult to get it completed in time. But if you’re able to allow your contractor to work as the plans are being finished and as you move on, that’s the key, and that’s the best way to operate. A little bit of flexibility within it to start working on a project before everything’s actually completely finished, piece it together as you go. Well said.

Robert [00:18:50]:

That’s good.

Robert [00:18:52]:

A huge shout out to Justin and Mac for joining us and sharing their invaluable insights on the ongoing challenges of building our future. For me, it’s a constant reminder that collaboration and developing those strong relationships between suppliers, contractors and consultants are absolutely crucial in this ever evolving landscape. Before we sign off, we want to thank our credible listeners that’s you your support means the world to us. We love hearing from you, so please keep those comments coming. Stay tuned for our next episode, where we’ll continue to bring you engaging, one of the kind, unique stories. Until then, take care and we’ll see you next time.