Breaking Ground
Larry Kraemer, Chief Operating Officer, Harkins Builders, Inc.
By Darryl Hicks
10 min read
How builders are coping with supply chain disruptions and rising costs
Supply chain delays, rising material costs, labor shortages. Construction companies have encountered these challenges before, but not during a global pandemic.
To better understand how builders are coping, I turned to Larry Kraemer.
Kraemer is the chief operating officer at Harkins Builders, Inc., based in Columbia, MD, one of the Mid-Atlantic’s top multifamily construction management firms. He joined Harkins as an estimator in 1989 and has provided exceptional client service for over 30 years in construction management, preconstruction, marketing, business development, operations and internal and external relationship management.
As Kraemer explained, increased communication with subcontractors, daily monitoring of pricing and product availability, and being able to scrounge and find product substitutes have allowed Harkins to weather the storm.
Tax Credit Advisor: How many affordable multifamily housing projects are currently in your construction pipeline? What percentage of these projects are affordable senior housing versus traditional affordable family housing?
Larry Kraemer: The number of jobs that are committed to Harkins and have funding include 28 projects that are affordable and about 20 percent of those are earmarked as senior housing. And that would be affordable senior. We also do market-rate senior, but the affordable senior is probably about six projects.
TCA: Which geographic areas are you currently active in? Are you mostly in the Mid-Atlantic or nationwide? Are there any new areas that you’re expanding into?
LK: We cover southeast Pennsylvania, New Jersey down into Virginia, North Carolina and South Carolina. In terms of expanding into new markets, we’ve only been in North Carolina for about three years and just finished our first affordable deal there. We’ll be looking at some affordable deals in Columbia, SC and in the Charleston area.
TCA: A slowdown in the supply chain for everything from building supplies to appliances, exacerbated by rising costs in lumber, copper, etc. has been a major problem. How has this impacted your construction timelines and budgets? Have you had to renegotiate contracts?
LK: It’s a major impact. As far as projects under contract, we honor those contracts and haven’t gone back to renegotiate budgets. But it’s definitely harder to meet the end date. We are having to source other materials and get the design team and client involved if we can’t get the specified product on time. There have been cases where we changed materials to meet timelines, not so much for budgetary reasons, but more the timelines. Anything new in pre-construction, we’re having a very tough time making the construction budgets work. We’re seeing price increases of ten to 20 percent on a lot of products over the last six months, so it’s a major impact. I think it’s hurting developers and their ability to close new deals, because it’s hard to lock in on a number. It’s hard to hold that number from six months ago, which is typical in the affordable world. With tax credit and HUD-funded projects, you’re locking in much earlier than you normally would, and those numbers aren’t good anymore.
TCA: What new materials are you having to use?
LK: Most people are aware of the lumber supply and demand issues and the cost increases, because they’re getting a lot of attention. But we’re having similar issues with steel and drywall and certain types of insulation and plywood materials. You can’t get Zip wall, so we’re having to switch to standard oriented strand board (OSB). Certain types of floor sheathing you can’t get, so we’re going to a more expensive floor sheathing product. Certain types of insulation are tough to get, so we’re having to change that when specified as well. Typically, that’s going to cost us more, but we don’t have the ability to pass that through, nor would we pass it through to our clients. A lot of times, we’re just trying to find a product that we can get and then get it approved. So, it’s a lot more effort. It’s a daily occurrence of what product we’re going to have issues with. What is the issue, timing, cost, and are substitutes available? Those discussions we’re having with subcontractors on a daily basis. It’s not just lumber, it’s across the board, everything from water heaters, appliances, drywall, plumbing fixtures you name it, it’s hard to get and there’s a much longer lead time than the industry is used to.
TCA: Are you having to conduct daily staff meetings to keep up with these issues?
LK: There’s definitely an increased focus on the material control, submittals and early awards. Just-in-time contracting is impossible. Any developer or builder that thinks they will get finished plans, bid it out to subcontractors, and then go build it is fooling themselves. You need six months lead time to pick that subcontractor, get the products approved, get it submitted, get it through the traditional process that’s months longer, and hope that you have it reserved for your project, so you get it on time. There’s a lot more upfront work and then a weekly review with the subcontractors – ‘I know you tell me I’m getting my water heaters or my dishwashers three weeks from now, but double check and triple check that.’ We’re micro-managing the material supply chain to make sure that we’re getting our products and spending a lot more time up front.
TCA: Are there any construction innovations that your team has devised to overcome these challenges that you can share with our readers?
LK: Innovation is tough, because that generally takes some time. We clearly have looked at off-site construction, modular, anything that you can prefab in advance of getting to the job site, but that takes time to get into the queue and process. Andrew McCoy is director of the Virginia Center for Housing Research, and he’s experimenting with concrete-printed 3D homes, which I’ve heard is being done out West and in Europe. Those are long-term plays in an industry that typically has supply-and-demand issues, but if affordable housing could find a substitute for wood, I think that’s only going to help the industry. There’s tremendous affordable housing supply need and lumber just can’t keep up. Sawmills have been bought out and downsized over the years to where only a handful of them exist that produce these products. We just can’t keep up with the demand. Any technology that can help will be a tremendous benefit to the industry. It’s no affordable solution right now, but our industry is resilient, and it will come.
TCA: How do you pick and choose which new projects to take on given these challenges?
LK: Most of our work is negotiated, so it starts with the client and design team working with us on the front-end. That’s a no-brainer. Asking us to bid something at this point is probably a non-starter, but look for a solid design team and client with a proven track record to get from point A to point B. There needs to be a consensus that this is a project we can put our resources into. We don’t charge for our pre-construction services, so putting resources into a project that’s a year to 18 months out is typically a big investment for us. We want to make sure we have the right team, project and solid financing plan in place. Repeat clients fill a lot of our backlog.
TCA: For the past few years, labor shortages have also been an issue for many construction companies. Is that still the case, or are you seeing any improvements in that area given the Biden administration’s more open immigration policies?
LK: Yes, we still are having labor shortages. Our subcontractors are running very lean. COVID and the pandemic have not helped that in any way. I think it’s too soon to say whether President Biden’s policies are going to change that game. It was here before President Trump and it will be here long after President Trump. Our industry is not replacing the workers it’s losing and that’s a problem we’ve been facing for the last 20 years.
TCA: Have the relationships with your subcontractors changed at all because of COVID? I imagine it can be a little tricky scheduling subcontractors to come on a particular day or week when you’re dealing with these supply chain issues. If so, have you implemented any measures to help improve that process?
LK: Definitely, the relationships have changed. They have become much stronger, especially with the amount of communication going on. We haven’t had traditional in-person meetings that we’re so used to in our industry, but we found other ways to communicate through Zoom or Microsoft Teams or just having outdoor meetings. There’s a whole lot more communication going on. Everyone understands that we’re dealing with a very challenging time. People understand the urgency of the world we’re dealing in. I think that, through most of this pandemic, construction was essential. In most states that we work, it was essential, so our workers really never got time off. We worked consistently throughout. That’s been a challenge, but I think the subcontractors understand that they were happy to be working and our people were happy to be providing those opportunities.
TCA: In the grand scheme, how has COVID changed Harkins Builders for the better? Do you see things returning to normal by year-end?
LK: It proved that we are very flexible, and we can overcome challenges. Some things that we put in place prior to the pandemic with our IT and project controls really helped out. We were using Microsoft Teams in January of 2020, so by the time March hit our people knew how to operate in that world. Along with a lot of our project controls, using some of our software for communicating between our teams and subcontractors and clients, for that matter, has definitely proven to be a huge benefit for Harkins. Our resiliency has been proven and tested and it just emphasizes the fact that if you can’t adapt to change, you won’t survive. Our industry is always changing. You can’t just do things the way you used to. We really didn’t miss a beat. Our volume was off maybe ten percent last year, but given how the rest of the world fared, we couldn’t be happier with our results. As far as returning to normal, I don’t think there is a normal in our industry. We’re always being challenged, whether it’s immigration or labor or material cost increases. The workforce and vaccinations, that will be behind us, but dealing with the fallout from a year of slowdown in production across the world, I think we’re going to be feeling that for some time.
