ABC Texas testimony on the effect of inflation on the construction industry.
TESTIMONY
OF
Geoffrey Tahuahua
President, Associated Builders and Contractors of Texas
before the
COMMITTEE ON FINANCE
TEXAS STATE SENATE
Interim Charge—Inflation: Review and report on the effect inflation is having on the business community and state government, including state salaries, retiree benefits, the state economy, and cost of state services.
Good morning, Chairwoman Huffman, Vice-Chair Hinojosa, and distinguished members of the Committee. My name is Geoffrey Tahuahua, and I am here on behalf of the Associated Builders and Contractors of Texas. ABC Texas is comprised of over 1,700 members across the state and represents all specialties within the Texas Construction industry including the industrial and commercial sectors.
We would like to begin by first thanking the Committee for inviting ABC Texas to testify on this important manner. As we are all working to adapt to this new post pandemic reality, our industry has been on the frontlines of this crisis and are very familiar with the challenges that it has presented. Our national association periodically release two indicators to help us understand how the industry feels about the economy.
The Construction Backlog Indicator which reflects the amount of work that will be performed by commercial and industrial construction contractors in the months ahead, reported on April 12 (Exhibit A) that the CBI had increased to 8.3 months in March.
This information is generally good news because it signifies that as projects continue to be completed there is work available for them to move onto. In Texas, we were fortunate enough to have construction deemed essential, so we were able to avoid a complete shutdown here in Austin and construction sites across the state continued to work safely through the pandemic. This meant that we didn’t see as many project cancellations during the pandemic, but we did see some delays, most of which were due to financing concerns or a retooling of the project itself. For example, in one project we saw a major company rework the floor plates and ventilation system in their new office building to ensure smaller groups of employees congregating to prevent any wide spread of future illnesses. This led to a slight delay of the project, but the project is now nearing completion and only a few months delayed.
The other indicator is our Construction Confidence Indicator (Exhibit B). This indicator measures the industry’s confidence in items like Profit Margins, Sales Expectations, and Staffing Levels. This indicator saw a slight decline, but our economist believes that given the significant construction backlog, and the fact that all three indicators remain above the 50% threshold, the decrease in confidence has more to do with long term uncertainty, not the next 6-8 months.
Going forward, one of main challenge for our industry will be the continued rise in costs for materials as well as their availability.
Take plywood for example. In construction we measure by “thousand board feet” for estimating purposes. In 2016, the price for a thousand board feet of plywood was about $240. Pre-pandemic, in January 2020 it was at about $400.
During last year’s peak over the summer, the price per thousand board feet was over $1,500. Now it appears to be holding around $1,000, but the volatile nature of this commodity is sending ripple effects throughout the industry. But it’s not just this material, but everything from conduit, to concrete, to tiles, and toilets that we are seeing an increase.
This has forced our industry to have to adapt our contracts with our clients in a few different ways:
Passing all the price increase to the owner. In this instance, there is usually a provision that states that the owner is responsible to cover the cost all price increases. In some instances, a price is also quoted for certain materials and then it states that if the owner doesn’t act within a certain time frame, then they will be responsible for any price increase.
Contingency. This has always been a common practice where we build a contingency into the overall budget of the project. The difference is that the overall cost to do the project has increased substantially due to this contingency number going up and that tends to fluctuate greatly.
Advance Deposits. In this system, the owner agrees to advancing funding for the purchase of specific materials that you believe will be subject to price escalation. It also provides an incentive to suppliers to hold their price to certain levels by providing them a guaranteed order.
We’ve also seen instances where contracts are phased to deal with the price escalations. This is largely because any project longer than 12 months will likely see substantial increases. In this structure, the contract may be broken into three or more phases where the owner agrees to pricing and cost for the initial grading and site work, then a second contract will be drafted for the construction of the physical building with new pricing and costs, and finally a third contract for the final finish out and turnover.
I would be remiss if I did not also mention the continued shortage of construction labor. Texas is very fortunate to have a strong and diverse economy, however that also means that all our industries are competing for the same people in the labor pool.
Our national association estimates that the construction industry needs 650,000 additional workers to keep up with demand (Exhibit C). In Texas, this equates to tens of thousands of job openings we have, but very few people to fill them. Last year at a large manufacturing project, it was estimated that at that one site, there was a shortage of over 300 electricians. This shortage existed before the pandemic, but due to the recent events of the last two years, this problem has only been exacerbated. More must be done to help fill the gap of this shortage of skilled workers, and ABC Texas stands committed to help facilitate this however we can.
All of this points to one key item of importance: flexibility. If there is anything that the pandemic has taught our industry, it’s the importance of being flexible and learning to adapt as fast as possible in an ever-changing environment. Unfortunately, this could present a challenge for future construction contracts for the State of Texas and should be examined. The state will not be insulated to the rising materials costs or the ongoing labor shortage. If state construction contracts do not allow for flexibility for price escalation or a contingency to cover the costs, then this will likely lead to fewer companies willing to bid or work with the state on their projects. This will mean the overall costs for projects will go up even more than necessary and will be a greater cost to the taxpayer. This flexibility is especially critical on infrastructure projects where the materials can sometimes be more difficult to acquire, or the price fluctuation is greater.
Thank you again for this opportunity to speak with you today. I’m happy to answer any questions you may have.