The Rise of Construction Costs

Don’t be fooled by the headlines. While building material pricing took a short dip earlier this year and price increases overall have been minimal since then, the continued shortage in skilled labor is offsetting any gains made on the material side of the construction business.

The commercial real estate market is booming again and demand for more multifamily construction is on the rise; However, it is not uncommon for projects to cost more and take longer to complete than just a few years ago.

Just about all of the developers we have talked with recently seem to agree. Many lenders have started to require developers to devote more funds to contingency budgets. Material price increases have always been easy to identify and are generally a clear increase for clients to understand. However, the effects of ongoing labor shortages, while sometimes subtle and more difficult to identify, have been far more impactful.

Building Materials Price Increases

In the Dallas-Fort Worth area, apartment building construction has surpassed single-family home construction. However, economists and some developers worry that apartment starts will fall as petroleum prices continue to fall while costs and speed to market grow.

Reports from Engineering News Record (ENR) showed that prices for construction materials in general rose 1% in September 2015 with notable increases in lumber for pine and “other commonly used species of 2x4s.”

Overall, our projects have not been affected too greatly by material increases. Slight cost increases are generally something that can be overcome fairly easily; it is the cost overruns at the tail end of a project that can really do the most damage.

Skilled Labor Shortage

While unemployment within the construction industry has dropped significantly over the last 6 months, smaller talent pools and shortages in skilled labor remain an issue for the industry. This lack of labor has had a resounding impact on construction costs.

For example, a subcontractor who may previously have provided a 10-man crew is more likely to be set up two five-man crews and split them between two different jobs. In addition, the experience level of the foremen leading these crews has also diminished within the last five years.

The lack of experience many projects are exposed to today can affect crew efficiency, quality of work and increase the potential for re-work. It is the snowball effect of this risk spread over multiple trades that holds the greatest risk for cost overruns with schedule delays.

Extended construction schedules come with a myriad of extra monthly costs such as site supervision, equipment rentals, temporary power, phone and data lines, and insurance extensions just to name a few.  All of these add up quickly when schedules get extended.  This is why project superintendent experience is so important to us as a general contractor as they are able to raise flags as soon as they see production starting to slip, enabling us to develop mitigation plans to minimize the potential impact to the project.

In addition to the experience of our own personnel, we also place a strong emphasis on establishing rapport and maintaining a strong relationship with our subcontractors. These vital crew members are looking to work on projects where they are likely to maximize their profits, receive their payment on time and know the project schedule takes precedence.

As a GC, if we can use the experience and relationships that we have to keep the project moving forward, everyone benefits.

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