Overcoming the Uncertainty of Rising Construction Costs

 The benefits of partnering with a team of experts who has their finger on the pulse of the latest industry trends.

As anyone in the building industry will tell you, construction costs have spiked dramatically in recent months. The rising prices in the building industry have been so frequent— literally sometimes changing by the day — that quoting accurate building materials estimates and pricing out projects for clients has become a significant challenge.

Though construction costs are generally known for their volatility in the market, the prolonged nature of this spike has many worried that the industry is reaching unsustainable levels. Meanwhile, longer lead times have contributed to a shift in focus from on-demand deliveries to an obsession with careful planning and coordination. Challenged with providing the most accurate cost estimates as possible for our projects, contractors must analyze the latest data and keep their finger on the pulse of the rapidly changing market trends. 

Lumber Takes Center Stage

The biggest culprit to the pricing drama is lumber, with prices skyrocketing more than 300% of what they were in April 2020. According to The National Association of Home Builders, this spike in lumber costs has added nearly $13,000 to the average price of a multifamily home and about $36,000 to the average price of a new single-family home. Even before the spike in lumber costs, home prices were already rising due to a long-standing housing shortage that’s made it even harder for families to buy affordable homes.

What caused this rapid increase to lumber costs? Many attribute the lack of supply to an initial misevaluation of demand early on in the pandemic. When the first shutdowns began and the world was beginning to adopt social distancing, masking and other safety protocols, many in the building industry anticipated a slowdown in construction along with the rest of the economy. As a result, mill operators and dealers cut back on lumber production. Already dealing with stiff tariffs on Canadian lumber and seeing a slightly slower trend to housing starts pre-pandemic, this was understandable at the time.

Few expected the boom that would soon take place in the home improvement and renovation industry. When the pandemic first started, Houzz, an online home remodeling platform, reported a 58% annual increase in project leads for home professionals in June last year. As more and more workers were spending time away from the office, the home became a haven and demand for remodeling, home upgrades and new home construction flew through the roof. 

That trend hasn’t abated in 2021. According to a Q2 2021 Barometer press release from Houzz, “Following a busy first quarter, businesses are faced with soaring homeowner demand along with lengthy permitting timelines, supply chain constraints and unrelenting labor shortages. These constraints likely contribute to industry-wide wait times of more than two months before a business can begin a new project.” 

Even when quarter after quarter showed demand wasn’t slowing down, the lumber suppliers continued to produce way below capacity. As COVID restrictions begin to fall across the country, the supply chain is struggling to keep up with the demand.

Cement, Copper, Steel, PVC and other materials

Though lumber certainly is taking the headlines, it is not the only area of concern. Collectively, the cost of building supplies has increased by close to 13% over the past year, according to Bisnow. In the DFW area, cement has been a growing concern exacerbated by the historic Texas ice storm in February. In fact, one major DFW area supplier was already working to recover from a system failure that reduced production by more than half in late 2020. The storm forced them to halt production and set them back even further.

In March alone, construction materials prices have increased dramatically when comparing year-over-year data. Diesel fuel rose 79.5%, iron and steel scrap nearly 60%, copper scraps about 63%, copper and brass mill products by 44.2% and even plastic construction products costs rose about 10%, according to the Bureau of Labor Statistics’ producer price index as reported by Bisnow. There has also been significant difficulty fulfilling appliance needs for new construction projects as builders have reported months of backorders that force them to delay bringing properties to market. 

Looking Ahead

It’s not surprising for someone to be caught off guard by the current prices if they’re unfamiliar with the volatility of the market. For seasoned professionals, the challenges of rising construction costs are anticipated, though perhaps not quite to the extreme we’re seeing now. However, as a general contractor, KWA recognizes that in a world that requires diligent planning and coordination, it’s our responsibility to keep abreast of the shifting economy.

In an effort to bring about positive change, organizations like the Dallas Builders’ Association and the National Association of Home Builders continue to advocate for policy updates that benefit the industry. According to the Dallas Builders’ Association, some of their key initiatives involve petitioning the White House to undertake a thorough examination of the lumber supply chain and seek remedies that will increase production. They also want the government to negotiate more favorable agreements with Canadian lumber suppliers while removing the current tariffs to alleviate some of the pricing pressure.

Preconstruction planning must be both proactive and reactive, allowing for flexibility to adjust to the latest industry insights. As proper estimation is essential to overcoming the natural uncertainty that has crept into the mix due to the constant rising of prices over the past six months, it is crucial to maintain a relationship with a contractor who has their eyes on the market and can keep their clients apprised of what’s happening. Though the rise of construction materials costs is troubling, it is not all doom and gloom by any means. When you have the right partners and up-to-date information, you can weather this temporary storm and come out stronger than before.

By Brian Webster, President of KWA Construction