As Ontario recovers from the COVID-19 pandemic, the construction industry is facing an unfamiliar economic landscape. With inflation at a 30-year high, a low labour force participation rate, and significant supply chain delays, contractors must revisit the risk allocation models used for bids and tenders in order to account for the uncertainty of current market conditions. This article highlights several key factors that contractors should consider in their risk allocation analyses during the bidding and tendering process.
Inflation Increasing the Cost of Materials
When preparing a bid, contractors must delicately balance their price between underbidding, where they risk undercutting their available profit margin, or overbidding, where they can price themselves out of the project. In light of the year-over-year inflation reaching 4.8% between January 2021 and January 2022, many contractors have struggled with the price of materials reaching levels far beyond what they had typically expected to pay in the past. As a result of these increases, contractors with existing fixed price contracts have been faced with reduced profit margins and, in some cases, with the choice of whether to supply the materials at a loss.
While the prices of certain materials have stabilized and/or begun to trend towards their historically anticipated price points (e.g. lumber), this ‘normalization’ of prices is being offset by increased energy prices which affect ancillary cost issues such as the costs to transport and deliver these materials.
Contractors should also keep in mind that the Bank of Canada has forecasted that inflation will average 3.4% for 2022, and incorporate these anticipated additional cost increases into their pricing models for any medium to longer term projects.
Depending on the type of bidding process being undertaken, contractors may also consider whether it would be prudent to propose the inclusion of escalation clauses through pre-bid questions or discussions with an owner.
Although some of the pricing volatility has settled, it is important for contractors to ensure their costing and pricing accounts for both the current and forecasted prices of materials.
Labour Shortages and Availability of Workers
The COVID-19 pandemic has also resulted in a ‘perfect storm’ of labour shortages by exacerbating pre-existing industry trends. The combined effect of fewer entrants into the trades, the reduced ability to train apprentices, and a surge in the number of retirements has created a significant decrease in the availability of skilled tradespeople and labourers. Together with the continued growth of the construction industry as a whole, this has resulted in contractors facing increased difficulty ensuring that they have sufficient forces for projects.
With all of these pressures on the labour market, contractors should give some thought to how they will deal with employee turnover on a project so that they can continue to meet project deadlines without delay. Contractors may want to create plans, sooner rather than later, for recruiting new employees, retaining key personnel, and cross-training current employees to ensure there are no gaps in available skillsets in the event of an employee’s resignation.
During the bidding and tendering phase, contractors should carefully consider how projects are staffed and the impact of those staffing decisions on project timelines. While additional employees on a project may make it easier to meet deadlines, it will reduce the contractor’s profits; fewer employees on a project, however, increases the risk that the contractor will not be able to meet their deadlines and bear the responsibility of any delays to the project and to other trades.
Supply Chain Delays and Shortages of Materials
The supply chain bottlenecks and shortages of common building materials that have become prevalent over the past two years are also amongst the major factors that contractors must factor in when preparing their bids.
A few years ago, contractors could easily run to the store or place an emergency order from a supplier when they had run out of common materials. Now, contractors no longer have the comfort that the same materials will be available on short notice.
In preparing bids, contractors should weigh whether to price their bids using a just-in-time inventory system, with its risks of delayed deliveries, or purchasing more or all of the materials at the outset of the project and paying the additional costs associated with storage, security, and insurance.
Contractors may also consider whether it is in their best interest to sole-source the supply of certain materials, or whether to purchase smaller quantities of the materials from multiple suppliers.
Where possible, contractors should also try to amend their contracts’ force majeure clause to include supply chain delays as force majeure events.
Delayed deliveries and shortages of materials can have profound impacts on the progress of a project. Contractors, therefore, should be giving considerable thought to how they might reduce the possibility of their own work being delayed, and being held responsible, along with their suppliers, for any delay caused to the Project.
The past two years have brought changes to the construction industry that should prompt contractors to re-evaluate the risk allocation models they are using to prepare their bids and tenders as rising costs, a shrinking labour force, and delayed deliveries are putting pressure on contractors like never before.
Contractors should review the bid packages upon receipt and carefully assess what resources will be required for the project. Contractors should also consider consulting their lawyers for assistance with understanding risks on any draft contracts provided by an owner, what questions should be asked of the bid coordinator, consultant, or owner about the contract during any question period, and/or negotiating the contract.