WWEMA Window: Challenges For The Construction Market In The Water Industry

By Allen Walker

Welcome to the new normal, as they say. I am not sure I want the new normal to stay for very long, but some things are just not in my control.

I have been in the water industry since 1981 and have seen a few ups and downs in the economy that were created by fuel shortages, wars, labor shortages, inflation, etc. This is the first time I have seen the impacts on the economy that were caused by several of the aforementioned occurring all at once.

The federal government is trying to lessen the costs to individuals of improving our nation’s water infrastructure by providing generous funding programs that include the recently implemented American Rescue Plan Act (ARPA) and the Bipartisan Infrastructure Law. This funding will certainly be appreciated by the many utilities it is intended for, but it won’t go as far as the legislators envisioned due to inflation.

Common protocol for allocating federal funds usually begins a couple of years before the money is issued to the various state coffers for distribution to approved projects. This means that the engineer’s estimate for the funding has been established many months before the project is recognized as fundable by the approval process. Historically, this has not been a big issue since inflation was “predictable,” but times have changed.

Recent history is educating us all on the unpredictability created by raw materials, fuel, and labor variables. The big lesson everyone is still learning is how manufacturers and contractors deal with the risks involved when quoting/bidding on projects. Manufacturers are having to deal with raw materials quotes that are good for 24 hours, freight rates that are good for only a few days, and labor challenges that impact delivery. Furthermore, COVID-19 protocols are still in place at many manufacturing facilities for employees who contract it, resulting in lost in-person production days.

Contractors have similar issues, and they are compounded on larger projects that take multiple years to build. They risk being obligated to months-old pricing that is woefully below current market costs and are constantly having to negotiate with owners on how to overcome that financial discrepancy. Equipment delivery quotes they get from various manufacturers are constantly at risk due to lack of containers, drivers, and fluctuating fuel costs. Any delay in a contract completion date means added costs to keep the job trailer and personnel onsite for longer than what was budgeted.

Recently, there is an interest in group participation to mitigate inflationary costs before projects are bid. The engineers and owners are discussing alternative methods of managing a project in order to keep unknown future inflation costs as low as possible. Some challenges are as follows:

• Most bid documents require a contractor to hold their bid prices for at least 60 days. Contractors are receiving material and equipment costs that are guaranteed for less time than 60 days.
• Shop drawing review and approval periods take too long. Protracted shop drawing review and approval periods exacerbate the risks associated with material costs and inflation for suppliers and contractors.
• Many construction sites have limited land space to store equipment that is delivered months earlier than it can be installed. To compensate for this, contractors could put “deliver-no-sooner-than” clauses in their purchase orders to manufacturers and have minimal, if any, negative consequences. That is not the case today and these clauses can have both more severe penalties and more rigorous enforcement.
• It is more common now that manufacturers who use quite a bit of steel or iron are quoting 24-hour or two-week guaranteed pricing. Contractors can only absorb so much risk and seek to pass along any additional costs to the owner for increases beyond the traditional risk assumed.

The owners and their engineers are discussing ways to address all these items in a fair and reasonable manner prior to the project bidding. The intention is to define what risks the contractor should assume and what risks the owners will be flexible with by adding instructions to the bidders in the bid form. Some ideas are as follows:

• The instruction to bidders may state that the shop drawing review turnaround time must be done within a defined period. If the shop drawings cannot be approved due to issues outside of the manufacturers control within that period of time, then the manufacturer can pass along any additional material costs accrued over the extended period. The idea is that all parties can price in the risk associated with set time periods for certain materials and the bid form can go as far as to assign different shop drawing review times for a variety of less or more complicated products.
• The instruction to bidders can allow for payment on stored equipment at the manufacturer’s facility or a bonded warehouse. This idea allows the manufacturer to build it as soon as possible rather than delay production to meet the contractor’s construction schedule.
• Owners and engineers are letting the bidders know at the pre-bid meetings that they will have a team assigned to meet with the contractor post-bid and prioritize what products must be ordered first, not only to meet the contractor’s construction schedule but to determine which products have the most steel or petroleum-based materials of construction and have the orders for them to go out first. The next critical task will be to prioritize the team to get shop drawing approval done quickly.
• Owners are defining the inflationary formula they wish all parties to abide by, either in the bid documents or at the pre-bid meeting. In all such instances, it is noted that all inflationary costs presented to the owner for review must be well documented and proven in a timely manner in order to be considered. This will require the manufacturers to offer letters noting inflationary causes and exact details on the reason for the price increase to the contractors; and all such letters are held as confidential for a defined period, so the manufacturers proprietary reasons are not shared on the open market.
• Owners and engineers are contemplating adding a line item in the bid tab for contractors to provide a price per day for staying on the project longer than the published contract construction period specified on bid day. The intent is to predetermine the value for an extension to the project timeline in the event product deliveries create the need for an extension.

These are just some of the conversations going on about how to address the new normal and its uncertainty.

Allen Walker is Senior Sales Engineer at Templeton & Associates Engineering Sales, a Manufacturer Representative firm that is located in Suwanee, GA. Walker serves as the Chair of the Water and Wastewater Equipment Manufacturers Association (WWEMA) Manufacturers Representatives Council and is a member of the WWEMA Board of Directors. WWEMA is a non-profit trade association that has been working for water and wastewater technology and service providers since 1908. WWEMA’s members supply the most sophisticated leading-edge technologies and services, offering solutions to every water-related environmental problem and need facing today’s society. For more information about WWEMA, visit www.wwema.org.