This "whatever" period of the pandemic age we live in is increasingly marked by mounting global economic disruptions that are significantly impacting the global supply chain.
Supply chain issues – both material and personnel – are affecting the cost and schedule of our nation's aviation infrastructure projects. These issues could complicate the delivery of the highly anticipated and much needed Infrastructure Investment and Jobs Act or the Bipartisan Infrastructure Law (BIL).
The BIL was passed to rebuild America's infrastructure, including roads, bridges, rail, and airports, to name a few infrastructure priorities. For the aviation industry, the Federal Aviation Administration (FAA) will administer approximately $25 billion over five years through Airport Infrastructure Grants (AIG), Airport Terminal Program (ATP) discretionary grants and State Block Grants.
The FAA calls the BIL a once-in-a-generation investment in America’s transportation network. But what if the supply chain issues we are experiencing now obscure that investment?
The FAA will allocate AIG and ATP funds annually starting FY2022 through FY2026. The first batch of funds were awarded in July, and we are already focusing on getting ready for the FY23 allocation. Once these funds are obligated or granted, the sponsor has a four-year period of performance (POP).
Once the grant is signed, the clock starts ticking. The big question is: Can we complete these projects in the short time given and the long delays we’re experiencing?
Supply Chain Snarls Deal New Disruptions
When evaluating aviation infrastructure projects, delivery methods are selected often for their cost and schedule certainty. Now, it is practically impossible to find cost and schedule certainty during this supply chain crisis, no matter the delivery method.
Ever since people started returning to work after the initial COVID-19 pandemic shutdown in 2020, there have been complications in just getting back to where we were before the pandemic. For more than two years now, the construction industry has been buffeted by an unprecedented increase in material costs, supply-chain disruptions and a tight labor market caused by shuttered manufacturers and suppliers.
But it hasn’t just been the pandemic that has caused disruptions to the supply chain. Consider, just in the last 18 months:
- The deep freeze in Texas damaged petrochemical plants that produce resins for construction plastics.
- Hurricane Ida further damaged plastics manufacturing by destroying some of the electrical grid in Louisiana.
- Wildfires in British Columbia and the soggy conditions in the Southeastern U.S. adversely affected lumber production.
- Evergreen's cargo ship Ever Given blocked the Suez Canal for several days, creating a backup in shipping that continues today.
- A bridge crossing the Mississippi River in Memphis, TN, failed, causing even more disruptions.
- The Russian invasion of Ukraine this year has created steeper and more sudden price increases and disruptions through diversions, tariffs and blockages of cargo, affecting everything from pig iron and neon to aluminum and ceramic tile.
As materials have been harder to find, their costs have skyrocketed. From May 2020 to May 2022, diesel fuel prices rose by more than $3 per gallon, from $2.39 to $5.57. As a result, now almost everything has a fuel surcharge added to the cost of the product.
In that same period, steel rose by 113% before beginning to ease this year. Wholesale prices for plywood jumped from $400 to $1,500 per 1,000 square feet. Copper and aluminum prices doubled. Plastic and resin producer prices climbed by 33 percent and gypsum jumped 25 percent.
Our traditional bid escalation factors cannot insulate a project from these types of price increases. Pricing aside, from a materials point of view, we are now seeing exceptionally long lead times for electrical transformers, switchgear, paint, insulation, windows and roofing.
As demand surges, plant outages and truck driver shortages have created lengthy delays in ready-mix concrete pours. In some locations, concrete is being rationed to 300 yards per day on large jobs and 100 yards per day on small or new jobs.
Contractors are now informed shortly before an expected delivery that the expected item will not arrive for months or, if available, be of a lesser quality than ordered or expected. As a result, some steel may not be quoted until it is in the mill.
In addition, many subcontractor bids are only good for 10 days. Even when awarded, the situation can change enough that many suppliers and subcontractors are forced to tear up their bids because cost and delivery have changed enough to no longer provide the contracted product at the quoted price.
Labor Pressures Increase
As difficult as the supply chain is to manage, available labor is causing a similar crunch. Construction companies are far short of the workers they are looking for. Since May 2021, construction job openings have climbed 20 percent.
As a result, many companies are resorting to more overtime, which means higher costs and the potential for burnout. To retain and attract the workers they need, construction companies raise wages, which gets passed on to the projects they are working on.
Architectural and engineering companies are on the hunt for talent as well. For many AEC firms in the industry, the market never really turned down during the pandemic. Now with new work coming in, many firms are looking to expand.
According to Zweig Group’s 2022 Recruitment and Retention Report of AEC Firms, one out of three firms that responded to the survey – 134 firms in all – admit their hiring needs are beyond the scope of their in-house HR/recruitment staff. Over 80% of firms reported it takes, on average, more than 30 days to hire a candidate.
As with other employers during the pandemic, some employees were lost and have not returned. Challenged with employee retention, professional firms quickly were forced to adopt a hybrid workforce, and many are still adapting to this concept.
As a result, we are often seeing 100% differences between various bidders. In some cases, we see only one bidder on projects, which can significantly complicate awarding a project on a competitive bid basis. Similar to sub-trades, we are getting many one and two-bid submissions.
I cannot illuminate enough the need for contract documents to be complete and easy to bid in this strange environment, because hard-to-bid documents will result in higher prices, fewer bidders, and complicated completions.
There is no sign of when costs and availability will improve. The situation is far from normal, and there is no sign of any improvement in 2022.
Moving Forward in Spite of Challenges
Once the AIG and ATP funds are obligated or granted, the sponsor has a four-year POP to complete design and construction. When you think about design time and the current supply-chain issues, any significant project could feel pressured by a four-year POP.
With the AEC industry currently having more backlog than staffing to produce the work, in an economic environment that is less than conducive to schedule and cost certainty, how does this economic infrastructure windfall get done within the regulator's expectations?
What can we do, as an industry, to deliver on the BIL and create the infrastructure upgrades that BIL is expecting?
Let the airports be the bank. Until AIG and ATP grants are obligated, the money can be "banked" by the airport. As consultants, we need to know the law inside and out and advise our clients well. If a complete project, both design and build, is to be done with the grants, then take a phased approach and a partial grant to fund the design first, leaving the construction portion in the bank. As a result, the four-year POP is not yet started for construction when you begin to design.
The POP can be extended for the right reasons. Supply chain issues should be easy to document, and the FAA has the authority to approve an extension of the four-year POP. While the FAA generally tries to minimize POP extensions, the effects of COVID and the current supply chain and inflation issues are creating more exceptions. If you have a particular project that you believe warrants an extension, the airport should submit an extension request, including their justification for it, to their servicing ADO. The extension request needs to be submitted well in advance of the POP end date.
Set realistic expectations. Work with airports so that everyone has reasonable expectations about the current costs and the likelihood of increases. In this environment, taking a rigid approach to construction completion and using liquidated damage clauses as the hammer will likely get you fewer participants and a much larger bid. Instead, include price adjustment and schedule adjustment clauses to protect both parties from unanticipated swings in materials and schedule. This will help eliminate force majeure claims.
Give the design team time. Designers need proper time to create accurate and complete bid documents. This will make the project easier to bid on and save time and money. In addition, less contingency will need to be carried as there should be fewer gray areas to be covered.
Discuss timing for ordering materials and components. Buying items earlier can protect against price escalation, although doing this through the builder generally will require a CMAR or design-build type of delivery mechanism unless the items become owner-furnished contractor-installed.
If airports want to pre-purchase items in hopes of having a better chance of cost and schedule certainty, they can leverage the airport’s remaining CARES Act funds. Additionally, CARES Act funds can be used to pay off debt you incur through pre-purchasing material. Be sure to talk with the FAA to confirm that purchasing material through the AIG and ATP does not start the four-year POP.
Discuss price estimate escalation practices with the builder and the designated estimator consultant. Current recommendations are to minimally use 1% per month through the end of 2022.
We are in a time of disruption that challenges many of our standard operating procedures, a time that requires us to look at things differently and quite possibly deploy a new standard to move forward. To move forward successfully, we cannot draw our inspiration from 2019 as we look toward 2025.
For many of us, this is a new normal. But even in the face of all these challenges, we as an industry have a great opportunity.
Roddy Boggus, AIA, NCARB, is a vice president of aviation at RS&H. A 30-year aviation professional, he excels in both airline- and airport-based practices as well as alternative delivery methods. Roddy is a facilities expert who has helped many large and medium hub airports streamline and provide exceptional service stakeholders through passenger flow, queuing, and operational efficiencies. He is a former Board Chair for the Airport Consultants Council (ACC) and Airports Council International (ACI) and has also served the International Association of Airport Executives (IAAE). He can be reached at [email protected].
