Construction and Human Resources

How to fight the rising cost of construction

November 30, 2014
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If you're planning a construction project or dusting off an old one, you've no doubt seen the impact of a rising demand for commercial construction labor and materials on your project’s budget.

In just the past nine months, construction costs in West Michigan have escalated 10 percent to 15 percent. The driving forces behind these increases are simple supply and demand. A pent-up demand for new construction along with a well-documented shortage of skilled trade labor is causing trade contractor bids to increase and material pricing to rapidly escalate.

So, what can you do to combat rising prices and meet your project goals? Here are four steps that will help you better control the cost of your next project.

1. Plan around industry trends

I recently took a business trip to visit a client in California. I left dreary, 30-degree weather and landed in sunny, 75-degree temps. At lunch, we discussed the change in seasons that we experience in Michigan and how we might miss that in places like southern California. Then I thought about the effect winter has on the construction market in Michigan.

Contractors must plan around winter. There are construction techniques and materials that simply cannot be used in the cold, so projects are scheduled around the winter months. This scheduling typically creates an upside-down bell curve of construction starts throughout the year. To maximize good weather, the best time to start construction is in the spring and the worst time is in the fall. This creates a lull in the winter where contractors are typically slower and looking for work to fill next year’s backlog. If you can plan your project accordingly so that you are bidding in late winter/early spring, you stand a better chance of getting more competitive bids. Wait too long into the spring, and most contractors are already booked for the summer. This point is where seasonal cost escalation starts.

2. Maximize your brainpower during planning

Building your project team early in the development of a project allows you to maximize the collective knowledge of a group and combine the efforts of professionals who are close to the market. Contract formats such as construction management, design/build or integrated project delivery all achieve the same goal of gathering construction professionals, designers and building owners early in the building design and construction process. While the design is being developed, the project team can establish budget goals early on and monitor the bidding climate in a project. This is important because your project is essentially competing for the same trade contractor bids as every other construction buyer at that time. A good architect and construction manager can explore construction materials and techniques that save money and time on your project. Getting these professionals in the room early will provide a project team with knowledge and tools to control your project’s cost.

3. Inquire about access to labor

Labor costs make up a significant portion of your project’s budget and can be the single most important element of completing your project on time. Shortages in labor cause trade contractors to sub-out portions of their work and bring in labor from out of the geographic area — both of which demand a premium on the normal labor costs. When considering your construction partners, inquire about their access to labor. Construction managers that have their own labor force can better control and plan for the labor demands on your project. Also, make sure that your construction manager clearly communicates the project expectations to the trade contractors bidding your project. This is particularly important regarding your construction schedule goals. Project delays will impact the manpower needs of each trade on the project, and paying for overtime is an expensive way to complete a project.

4. Start as soon as possible

Even with the periodic dips in our economy, cost generally increases over time. No matter what the current state of our economy, we are typically barraged with notices of material cost increases throughout the year. Because of this, the best defense against cost escalation is a good offense.

Starting with your internal development process, shortening the time between project conception and completion will ensure that you take advantage of the best pricing in the market. Of course, there are some exceptions (see item 1 above), but for the most part, the sooner you start the better the project budget. Projects that are bogged down in planning tend to run into issues with out-of-date cost estimates, material supplier changes and costly redesign fees — all increasing the final cost of your project. There is a healthy balance that all project teams need to find between due diligence and efficiency.

Business owners face rising costs on product every day. Understanding your options to hedge against the forces of the market is the best way to make informed decisions. You do not need to accept less for the same amount of money. With planning and assistance from the right professionals, your project can meet all of your organization’s goals.

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