Our design firm receives construction bids on multiple projects each month, most of which are fire or other public safety facilities. The construction cost tracking provided herein is based solely on pricing received on fire/rescue stations that we have been associated with over four decades. If you have intentions to build or renovate in the near future, please take a moment to consider what is happening in the construction world and what you can do about it to protect the viability of your upcoming project.
The roller coaster ride initially began after the 9-11 attacks in 2001. Along with other less significant factors, international uncertainty and the consumption of construction materials for the war efforts in Iraq and Afghanistan resulted in a one-year construction cost increase of nearly 20 percent. This was followed by the explosion of the Chinese economy which demanded much of the world’s construction material resources and led to another 20 percent plus increase, immediately followed by hurricane Katrina and the overnight consumption of significant construction materials and labor ... a 30 percent plus increase in construction costs!
So when the 2006 to 2007 construction inflation numbers were reported at a mere five percent, everyone started singing, “Happy Days Are Here Again.” Little did we know that it was a foreshadowing of the Great Recession at our door step.
From 2007 to 2008, construction prices decreased approximately 12 percent. Then from 2008 to 2009, they dropped another 16 percent. It was a great time to build a new station IF you had the capital in hand, and that was a big IF considering that the recession had greatly diminished public revenues. The projects that were “shovel-ready” and funded during this time became the beneficiaries of the lowest construction bids in years. This period was the beginning of a bad time to be in the construction industry. The lower bid costs were deceptive because they were not based on the contractor’s reduced material or labor cost. To the contrary, material costs continued to inflate. The lower bid costs were based on starving contractors giving away all hopes of profit in a too-often futile attempt at staying in business. Roughly one-third of all building contractors, subcontractors, and material suppliers that were in business four years ago do not exist today.
By the time the 2009 to 2010 construction inflation numbers came in, it was apparent that the building contractors who still existed had reached their bottom threshold of lowering prices to stay in business. Reducing labor costs could no longer counteract increasing material costs. That year saw a nine percent increase in bid results. The upward trend continued from 2010 to 2011 at an even greater 12 percent inflation rate.
A major factor during the price decline and inflation has been higher fuel expenses. There are ever-rising costs of moving bulk materials from mines (or forests) to mills, and then to consumers. Almost every construction material has to be transported to the site using fossil fuels. Also, many materials such as roofing, asphalt paving and plastic piping include petroleum products in them. Like all other businesses, building contractors have no choice but to pass along the costs of ever-increasing, governmental regulations and taxes in the form of labor rate increases.
As of the date this article was written, 2011 to 2012 is lining up to show a 10 percent plus construction cost increase. So, now we have returned (roughly) to the construction cost level that we were at when the recession started.
What can you do to avoid the greatest adverse impact to a construction project during these volatile times? Here are a few ideas that may help:
- Consider a scope change in what you need to build now. If portions of your facility are to accommodate future growth, design the building so that those portions can be easily built additions in the future. Maybe you can “shell-in” portions of the building and “upfit” them at a later date.
- Investigate whether a construction type change can fit your needs and program. Steel, masonry, wood, pre-cast concrete, pre-engineered metal, etc. all have their advantages and limitations. Knowing which of these construction types will fit your program needs and budget is critical.
- Set realistic construction budgets. Projecting construction costs several months early has never been more difficult than today. Protect yourself by using high cost estimates. Very few people will be upset with you when the project comes in under budget. If your department is like most others, it won’t be difficult to find something productive to do with leftover funding.
The Charlotte ARFF station (Charlotte-Douglas International Airport) was another project that benefited from the low construction bids of 2008– 2009 at $151/SF, base bid.
- Continually educate those that will provide your building funds. Whether it is a city council, town or county manager, department board, etc., you should regularly update them on current construction environments. Each time your designer provides an updated estimate make sure to pass the information along. Give them reference articles that describe the issue. Don’t let the decision makers get to Bid Day without knowing what to expect.
- Make wise, informed decisions, but move quickly. Construction inflation rates can eat away at your project scope in a very short period of time. For example, assume you have just the capital today for the project you need, but you are not ready to receive construction bids for 12 more months. If there is 10 percent construction inflation by bid opening, you will either have to get your hands on 10 percent more money, or reduce the building size/scope by 10 percent.
- Finally, design wisely. Make sure you and the rest of your design team know how to maximize your program needs in the minimum space. Every wasted square foot will cost you more money today than it did last month. It is more important than ever to select designers who know the ins-and-outs of your building type.
Don’t let the ups and downs of the construction climate stifle your plans. Just proceed wisely, do your homework and stay informed!