Procurement in Today's Market
Material Cost Increases and Supply Chain Disruption
A fair amount of concern surrounds the cost and availability of materials for large construction projects. For the past couple of years, we have been dealing with an increased demand for construction services combined with what is being termed supply chain disruptions for material including lumber, steel, copper, aluminum, PVC, and gypsum.
According to Turner Construction, “Second Quarter 2022 Turner Building Cost Index—which measures costs in the non-residential building construction market in the United States—had increased to the value of 1283. This represents a 2.23% quarterly increase from the First Quarter 2022 and an 8.09% yearly increase from the Second Quarter 2021.” Attilio Rivetti, the Turner Vice President responsible for compiling the Turner Cost Index said, “A comprehensive procurement strategy can reduce the risk of prolonged lead times and price escalation.”
At Energy Systems Group® (ESG), we have seen some stabilization in material prices, but do not expect them to return to pre-COVID levels. Lead time on equipment has been a concern which requires a trusted partner like ESG to conduct careful planning to make sure price and delivery are securely established.
Through our design-build process, we work with customers to preorder long lead time equipment during the engineering process. Our goal is to provide cost and delivery certainty and protect our customers against costly change orders.
The other issue is labor shortages. What we have learned in our 28 years of experience is to align our subcontracting partners in the engineering and design process to ensure constructibility and lock down labor resources.
Subcontractor backlogs have been reduced, but the ability for subcontractors to provide longer term pricing commitments is a real challenge. ESG mitigates a customer’s risk through a collaborative delivery process that directly involves the subcontractors early in the process such that they are part of the design team.
The cost of “do nothing” is real and, without careful planning, can have a huge impact on cost. Waiting is like trying to time the stock market. The answer is a partner, like ESG, who can assist with creating a plan that removes our customers from the risk associated with price and schedule. So, what should a customer do? The procurement process is a key starting point for price and schedule certainty. We recommend that customers move forward with a defined procurement process so that the engineering and design can happen early such that the contract grade numbers can be defined and the schedule mapped out.
Fluctuations in finance rates can also have an impact, so the cost of “wait and see” can also be huge. Particularly with the planned interest rates hikes announced by the Federal Reserve. If the customer is not prepared with a planned procurement process and initial design this puts the customer in line behind those who were shovel ready.
So how does one start the process? We recommend a qualifications-based procurement process to select a design-build partner. We have successfully helped many customers in educating administration and elected officials to support the needed improvements every step of the way. First, ESG develops a scope of work with budgetary pricing. Next, we work in collaboration with the customer to create a final scope of work for a turnkey implementation, based on the current market conditions and customer constraints. Lastly, ESG and our engineering team work towards a firm-fixed price and schedule to complete the work, on-time and under budget—guaranteed.
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ENERGY SYSTEMS GROUP®, a wholly owned subsidiary of CenterPoint Energy, Inc., is a leading sustainable energy solutions provider that specializes in energy efficiency, sustainability, resiliency, and infrastructure improvement solutions in the government, education, healthcare, commercial, and industrial sectors. ESG also offers a full range of sustainable infrastructure solutions including waste-to-energy, distributed generation, and renewable energy. To learn more about ESG, visit www.energysystemsgroup.com.