The Construction Insiders: Episode 2
Jason: Welcome to the latest episode of the Construction Insiders podcast, where our host, Jessica Busch, talks with industry experts about new trends, best practices, and how to successfully deliver construction projects in today’s market. Whatever your role on a project, we think you’ll find these discussions interesting and worth your time.
Jessica: Thanks, Jason. Okay, well we are back for the next episode of the Construction Insiders podcast. In this episode, we are going to be talking all about tariffs. We’ve been talking to clients, potential clients, internal team members, and everyone seems to want to know what’s going on, what to expect, how we got here, there’s a million questions and not too many people know the answers as it relates to our industry. So, after having these conversations, we thought maybe that should be our next podcast. So here we are today with our Vice President of Forecasting and Analytics at Cumming and we’re sitting down with Dan Pomfrett today. We’re going to discuss all things tariffs and get to the bottom of it so we know what’s going on. So without wasting much time, Dan, let’s jump right in. So, when did the tariffs begin, how are we where we are right now, give us some of the background.
Dan: Okay, so the tariffs started in late 2017, early 2018 under section 232 off the Trade Expansions Act, and really what they were looking at was US imports and exports and particularly focused on steel and aluminum and looking at how that was weakening the economy. The ultimate goal of the tariffs, as there have been various reasons that have been given — really, ultimately what they want to do is bring back domestic steel and aluminum production to the country and so those first round of tariffs, like I said in early 2018, resulted in about $360 billion dollars of products from China being affected.
Jessica: And so we’re saying tariffs plural, so how many rounds of tariffs have there been and is that normal to be spaced out like this?
Dan: There’s been about four rounds of tariffs since 2017 and depending on which track you’re taking there could be more, there could be less, it’s one of those ones that seems to keep bouncing around because every time you open a newspaper or read online, some tariffs are coming in, some are going away. But one important aspect of this is it’s not just China that’s affected by these tariffs. It’s also other countries like Mexico, Europe, Canada as well.
Jessica: Interesting, ok, because we don’t hear much about that in the US press currently.
Jessica: We hear just China, China, China, and that’s not necessarily the case you’re saying.
Dan: Correct yeah, uh, Europe has a lot of tariffs and they’re going, you know, retaliatory tariffs as well. Mexico and Canada had steel imports and export tariffs as well and that’s been dropped now, or largely been dropped now. So there’s a whole trench of countries that are involved in this.
Jessica: Interesting, it’s not reported as much. Um, and so to get back to the tariffs that we’re seeing and how it relates to the construction industry now that we’ve had some time to kind of see this play out. How is it affecting the construction industry?
Dan: Well, it’s funny because the first round of tariffs, steel prices jumped up quite considerably so there was a real big peak just as the tariffs commenced. But we’ve found over time that those tariffs have actually dropped now, so steel prices are actually back at pre-tariff levels. Similar things are now happening with, for example, with delivery, where we had — you know, we’re doing a lot of hospitality work and a lot of millwork, for example, comes from overseas and you know as that’s come through or as the tariffs have come up we’ve seen a jump in the price of not just millwork but also the rise in delivery charges as well, so there’s been a lot of on and off effects of it all. But it’s one of those ones that it’s just going to keep rolling on, like you say, you keep hearing about China. That, that really revolves around trade deficits and all that kind of good stuff, and at the moment there’s no real end in sight of it. You know, people keep talking about, like you say, things going one way or another, but at the moment it’s really difficult to put a thing on how it’s really going to play out.
Jessica: Has this helped the construction industry, has it hindered it? What have you been seeing over kind of this timeline of the tariffs with our industry and how long did it take to affect the industry?
Dan: It was pretty much immediate as soon as the tariffs got announced; the steel tariffs were more immediate than tariffs announced these days, because tariffs that get announced more recently, it’s very 50/50 if they actually get into play. You know, if you look at the US steel industry when the tariffs first came out in 2017, that year afterwards the steel industry was announced to have its most profitable year ever in the US, so…
Dan: So, it does help, it really comes down to whether you’re the purchaser, the supplier, or the customer as to how it affects you and which way it affects you.
Jessica: Okay because that’s what I was going to ask next with the different industries. If we were, you know, building a high-rise residential building versus being the manufacturer or the worker at the mill, how all that affects you and your job, I guess it all just kind of depends where you are in the process.
Dan: Yeah, yeah, where you are in that chain and that comes down to sort of a supply and demand where you know a lot of the tariffs that were issued in 2017 and the early days, a lot of those extra costs were actually absorbed by the supplier or the contractors. Nowadays, with those prices getting further and further wrapped up, that price is actually getting passed to the consumer. So yeah, there’s still a big supply in the industry but there’s also a big demand as well. Most markets are really really red hot at the moment so that’s going to continue to be not necessarily an issue, but it’s something that people need to keep in mind that it’s not just the tariffs that is the issue. It’s also the supply of the contractors, for example, in the market.
Jessica: Yes, interesting. On a personal note, we just did a renovation, a home renovation ourselves, and seeing that being passed through and the markups clearly stating the 25% increase in this is a result of X, Y, and Z tariff, and it was interesting to see that come through as a consumer.
Jessica: And see these current headline news items affect us at home.
Dan: Yeah, yeah, because the price is getting passed on. You know, I’m working with a client right now where they’re specifically putting in allowances for the escalation or the tariffs that come through, and the trouble is that given the size of those allowances you could be looking at projects that bid or bust on them.
Jessica: So, on that note, clients are putting in allowances for these costs, is it affecting all the way back at design level now? How is that process being affected?
Dan: Yeah, so designers particularly are more cognizant, not that they weren’t already, but more cognizant how or what they’re designing, whether there could be fluctuations. That works all the way through down to the contractor and owner. You know, a lot of contractors these days don’t take the risk on tariff or price increases, and so you know that that risk is just forever getting passed down the line and ultimately at the end of the day whether you get the contractor or the design team or whoever it is to take that risk, you know you’ll be paying for that risk, ultimately, in one form or another.
Jessica: Are clients asking us what we expect? Are they asking us for our input on how to move forward? What are these conversations like with clients or what should they be like? Are clients forgetting how much this could affect their project or what are those conversations like and are there things people should be asking that they aren’t asking?
Dan: Yeah, I suppose I see sort of two ends of the spectrum really. I get the clients that are very worried about it and load up their projects, they’re very concerned, but I have the other type of clients on the other end of the spectrum where they don’t, they don’t necessarily see or feel it’s going to impact their project that much. At the end of the day, when you look at a project, and if you take any type or any particular aspect of that project, the materials are going to be probably 40% of the price of whatever it is. And if you don’t have a lot of steel, for example, in your project, steel prices going on might not affect you. But I think it’s one of those things that the conversations people need to continually have is it needs to be continually monitored. As I mentioned, you know, projects keep, or press releases keep coming out, keep changing things. And therefore it’s always going to go up or down. The trouble is that when you’re going out to the market, depending how you’re going out to the market, and when you’re going out to the market for bids, that can really effect the price. Because one day, if you’re bidding someone and tariffs have just been announced for steel, then that’s going to jump up, for example, compared to when there’s no word of the tariffs.
Jessica: Okay, and so in terms of prices I guess we just continue to watch and see what comes out and then the projects could just go on from there in terms of pricing and planning. Do you have any idea if you could look into the future when you talk to clients that are worried? What do you kind of feel it looks like in terms of the prices and how really concerned should people be at this point?
Dan: I think it’s a continual concern and you know, obviously, the tariffs are targeted on specific products and services. You know, they’ve recently changed the way they look at the tariffs in terms of point of origin of the material compared to when the manufacturing occurred, so now a lot of clients are looking into different processes and approaches to that, but I think it’s something that needs to be continually tracked, because certainly when you’re looking at the tariffs and the cost of materials and pricing, like I say, a lot of contractors, a lot of members in that overall project will not take the risk on for the tariffs or the price increases, so it’s one of the things that needs to be continually tracked and I think it’s just doing it during the design phase or during the bid phase, if the contracts have these clauses that allow price increases to happen.
Jessica: Okay, so you know, getting early, kind of doing your due diligence then. But we hear about cost increases in general, so are these tariffs to blame for all of this change within the construction market? We’re also talking a lot internally here about labor daily, so is it all tariffs, is it a combination, a bad combination, what else is going on?
Dan: I mean, you get different people with different viewpoints. My viewpoint is that the tariffs are most important. It’s not the main driver of price increases — a lot of it is down to labor and availability and going back to that supply and demand. You know, construction volume, if you look at the whole US, is actually back up way past where it was before the downturn. However, construction labor is still — I think last figures I saw, 200,000 people in the industry less than in 2008, so there’s still an issue in terms of finding the labor to do the projects, particularly in the end trades like electrical, drywall, decorators, people like that. So I think, you know, I would say it’s a perfect storm, but it’s those two areas sort of culminating with actually going through and increasing the pricing. But you have red-hot markets like the San Francisco market and then you have other markets that are cooling down, so it’s certainly an interesting time in terms of tracking the pricing, because it really does change and pretty much wherever you are there’s all these economies that all change the pricing as well.
Jessica: So as you know, we are a third party, we come in, we are not the general contractor, we have our own systems, we are here for the client to advocate, to make sure that this entire project is seamless, we get it on budget and on time, and all these different factors to really oversee the project as a whole. Is there more of a need for people like us, less of a need? How do we — do we bring a different set of values to a project in this sort of scenario? Is there more or less collaboration needed among parties? How does that kind of play out?
Dan: Yeah, I mean we’re seeing very much a turn in the market, particularly over the last sort of 18 months, two years, three years, where people are now wanting third-party estimators and project managers to come in to their projects. You know, a lot of people now are very conscious of cost, but I think a lot of that has to do with the downturn and people were caught out by that and so people are very sort of worried that they don’t want that to happen again. And you know, as I mentioned, we’re independent and we don’t have skin in the game, so to speak. We’re given our unbiased view, so we’re really an advocate for the project, for the client; we’re not there to change things up or to have cost drive design, but really help people make informed decisions and that goes across every team member, from the owner to the architect to the contractor as well, so we’re really there to help bring value to that project and help make sure that it really achieves its objectives at the end of the day.
Jessica: It’s interesting, because people a lot of times are surprised that we have someone like you as a part of our team that really is looking to the future, while looking at what’s currently happening in the market, to really provide a holistic view as to what’s going on. Because when we are dealing with these multi-million-dollar projects, a little shift somewhere in that affects it majorly at the end of the day, and so to see just the little changes, those little ticks, it’s been really interesting to have you and be able to speak with you on kind of tracking those and seeing how they really effect the smallest change on a project’s end game, when it’s all finalized.
Dan: Yeah, because the way I look at it is that you have basically both direct and indirect effects of a project or costs, and just because gas prices go up, for example, doesn’t necessarily mean prices on that project are going to go up. But yeah, if we have a project that’s funded by someone that’s in the gas industry, then that could affect you indirectly, so yeah, it’s one of the things that we need to continuously track. You know, for us as a company, we create our own unique prices, we create our own data, we use our own databases and information, and so we need to be accurate and continue to track that. By being that active in the market in terms of knowledge expertise, that’s how we make sure we’re really on the top of our game and provide that accuracy to the project.
Jessica: That’s interesting. Just last episode, we sat down with Pete Melucci and talked about the published metrics on the MEP side and how important that was to have everyone moving towards a standardized set of metrics and then on the other side of it, in-house, we’re tracking these changes, we’re tracking the market to really give, again, that full perspective, that knowledge, that expertise to our clients for things like this, because we just don’t know what’s going to happen day to day, but we can use everything we have in-house to get us as close to that prediction and forecast, as close as we can.
Dan: Yeah, absolutely, and if everyone could have predicted the crash in 2009, then we’d all probably be rich, but you know, at the end of the day, it’s very difficult to track that and to estimate when those kind of things are going to happen. But what we bring is that aspect of being able to sit there and go, okay, this has happened or we think this is going to happen, how do we protect the project against that, how do we protect our clients against that, and how do we move forward in a way that’s more of a calculated risk rather than an unknown risk?
Jessica: Calculated, that’s key.
Jessica: Calculated risk, yes. Okay, well, awesome. So, you know, before we finish up, where do you kind of see this going and if you were to look towards 2020, how do you see that playing out? Anything else people should be aware of or kind of have in the back of their mind for their next meeting?
Dan: Yeah, I mean I think the labor issue is still going to be there and the supply and demand on the contracting side, so it’s going to be a continual issue, particularly in places like San Francisco. What is interesting to track in the moment is the migration of people from the higher-taxed states into the lower-taxed states, generally in the south, like Texas and locations like that, for example, that are actually drawing labor away. But you know, I think 2020 is going to be a little bit more of the same, there’s going to be uncertainty out there, there’s going to be that still-continuing conversation with China, so we say we’ll keep bouncing around.
Jessica: And I was going to ask about 2020 with the tariffs. I mean, is that still just going to be something we have to watch and figure out how to make next steps?
Dan: I think the one, as you mentioned, sort of going under the radar a bit is the European one, that’s a big market that we’re currently having tariffs conversations with, shall we say, and there’s been retaliatory tariffs there as well. The China one everyone knows about but it’s the European one that is the sort of probably more interesting one, because, like I say, it’s lesser known, it’s already affected things like the aviation market and other sectors like that.
Jessica: And I was going to ask, with being lesser of a headline news story over here, what are you seeing with that? We have a lot of clients over there, we work with a lot of companies over there that are doing projects here, how is that going to play out do you think?
Dan: Yeah, and again, you have things like Brexit that come up every day –
Jessica: Just always causing a –
Dan: That’s always fun, and you’ve got various economies as well that are on the brink of recession again. I mean, like Italy, for example. Then you’ve got some other locations that are not doing so well and then some other states or countries that are really prospering, so it’s a bit of a mixed bag in Europe. So how that will play out will be interesting. I mean, you take, for example, even on the political front, Spain has had its fourth election I think in four years. Yes, there’s a lot of that that is revolving around that can affect things and again it’s difficult to know how that’s really going to affect the US, but it certainly needs to be tracked and understood, because like you say, we have a lot of clients out there, a lot of products come out of Europe as well, so understanding how that works and how that will be supplied to the US will be interesting to track and understand as we go into 2020.
Jessica: For sure. It is all very interesting and ever-changing. So, well, awesome. Is there anything else that you wanted to bring up that we should keep our eyes on or are we just going to hope to get through 2020 as unscathed as possible?
Dan: Yeah, I think just one fair point to make that I mentioned before — we have these sort of microeconomies, so just to be aware of those and understand those, because, again, what’s happening in one city 20 miles away from another city can be vastly different, so just be aware and understand those, I think. And they even come into play more with the bigger cities starting to level out in 2020, so we’re going to see a lot more expansion in these, I wouldn’t say smaller, but yeah, these secondary —
Jessica: Secondary markets.
Dan: Secondary markets, yeah.
Jessica: Well, wonderful, thank you for joining us today Dan and I’m sure we’re going have you back to discuss some of your market information as we move through the next quarter, so thank you.
Dan: Thank you very much.
Jessica: And I appreciate it.
Jason: If you enjoyed this episode of Construction Insiders, we encourage you to check out our website at www.ccorpusa.com, that’s ccorpusa.com. Where you can find our full knowledge library under the Insights tab. It’s all great stuff, we’re really passionate about it, and we hope you’ll check it out. Thanks for listening.