If anyone recently looked for a new vehicle at the end of their lease and hoped for a vast selection, you likely heard a response similar to, “How important is a sunroof to you… And can you wait a few months?” While certain things are coming back (disinfecting wipes are back on the grocery shelves!), there are others that are still slowing things down and having a tremendous impact across –not just our country- the world.
Price escalation is abundant as the supplies are much less than the demand, a basic economics principle. Most of us are aware that it started because so many warehouses and manufacturing plants shut down due to the pandemic, or the efforts were redirected to pandemic related relief efforts. As the domino fell to the shipping companies, there was a cutback on the number of both containers and deliveries, and the backlash lingers. With the high demand for shipping, costs of moving things from point A to point B went up proportionally. Many parts of a finished product come from a variety of countries, so now if there are several items moving from points C, D, E and F that need to get back to A, there are a number of possible delays before they can come together and head over to B. If there was a shortage in shipping containers in one place, a lesser number of shipping companies available in another, or a limited dock space to accommodate for deliveries in the third, it is quick to escalate to significant delays. Now that I, for admittedly the first time, am finally thinking logistically, it is almost crazy this was barely a concern before.
Sources like the New York Times anticipate the supply chain issues will remain through 2022, and likely to extend well into the following year.
What does that mean for the surety industry? You likely recall, at the onset of the pandemic, many experts were anticipating a spike in surety claims. Much thanks to the government loans and programs to help contractors push through, we are now looking at delayed work that will push forward and spike –not claims – backlogs. Putting together the supplies needed to accommodate for a larger-than-typical aggregate workload is certainly a concern. Accommodating for the costs of those supplies, if they are available, is the next. The greatest risks are electronics, appliances, building products, chemicals, etc. Not to list everything but it is far-reaching.
Further, the impact of the trade war between China and the US should not be forgotten. The Phase One agreement, made in February 2020, was meant to soften the tariffs imposed in 2018 and increase China’s purchasing from the US. However, targets under this agreement have not been met. This poses questions as to whether we will see the tariffs adjust, and if pricing for goods adjust in turn. In January 2022, the current administration said, “it’s uncertain” as to when the time will come to begin lifting some of the tariffs put into place by the prior administration. What we know is that the impact was felt on pricing for things like imported metals and solar panels, and we do not anticipate that decreasing again anytime soon.
At the end of October 2021, the US DOT and state of California instituted the Emerging Projects Agreement, where the Build America Bureau of USDOT will support California State Transportation Agency for public and public-private projects. This will include upgrades to the ports, expanding rail capacity, developing inland warehouse storage, and land ports to expand trade capacity with both Mexico and Canada. U.S. Transportation Secretary Pete Buttigieg stated that they are working toward ramping up the infrastructure, which he pointed to as a contributor to supply chain issues in an article published by FreightWaves. Shortly thereafter, a $1.2trillion infrastructure bill, the Infrastructure Investment and Jobs Act (IIJA), was passed by Congress with the intent to improve transportation networks, water and power systems, as well as internet connections, throughout the United States. Both NASBP and the SFAA advocated extensively for this bill, and the work released under the IIJA will require bonding under the Miller Act, which requires Federal contracts to be bonded when valued over $100,000. While this is certainly a positive for construction, most of these projects are not yet shovel-ready, so there will be a delay in the onset of the IIJA’s impact.
All that said, there is movement coming that can and will certainly boost the construction industry, but, in the meantime, review your contracts and take steps to ensure you can accommodate for price escalations, supply chain related delays, and completion time requirements. Risk management should include examining the global fluctuations as the pandemic and other issues vary throughout the world and could have impacts depending on when, what, and where you need certain things. Ensure your broker is aware of any pain points as they may have advice along the way to help mitigate them.