Every couple of years, I look back with amazement at where the constructions costs of fire/rescue facilities have been, and where they are going. I realize that I’m getting old, but I’m reminded just how old I’m getting when I look back at the construction cost of the fire stations our firm designed in the 1970s.
At that time, you could build a quality station —we’re not talking pole barn — for $X+ per square foot. I’d love to reminisce and trace the four-decade history of how those costs have changed, but it suffices to say quality stations cost a little more than that today!
In the good ole’ days you could count on consistent construction cost inflation of three to five percent per year. If you were developing a Capital Improvement Plan for a new station three years from now, you would just take today’s construction costs, increase it by three to five percent per year for three years and know that what you had budgeted would likely be fine. Not anymore!
We all understand that the construction industry has always experienced price spikes (and rarely decreases) mostly due to some sort of material or labor force issue. Many departments, who one year ago, budgeted more than enough funds to build, are now this year forced to scale back their plans
Our design firm typically 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.
From 1999 until 2006 the construction industry was booming. That was great for those in the industry, but not so great for those wanting to build. Along with a very busy construction market, there were events that caused incredible construction cost increases during that period. The war efforts following the 911 attacks, the tremendous growth of the Chinese economy, natural disasters such as Hurricane Katrina, these were just some of the events that commonly yielded 15 to 30 percent increases per year construction inflation rates.
So, when the 2006 to 2007 construction inflation numbers were reported at a mere five percent, everyone gave a sigh of relief. Little did we know that it was a foreshadowing of the Great Recession knocking on our door.
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 went out of business during this period.
By the time that 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. From 2011 to 2012 showed eight percent plus construction cost increase, which returned us to the construction cost level prior to the recession. The year 2013 finished with a nine percent increase from 2012.
The next year, 2014, ended with a fire/rescue station construction inflation increase of between 20 to 23 percent over 2013. There were several factors that caused such a significant increase, but the most prominent reason was “supply and demand.” Owners had delayed their building projects for as long as they could. Many decided 2014 was the year to move forward with their overdue projects. Remember how we mentioned that so many building contractors, subcontractors, and material suppliers went out of business during the Great Recession? Those that survived had been extremely cautious in “staffing-up.” Who could blame them? The result was that the demand for materials and labor far exceeded the supply. The number of bidders on public construction bids reached the lowest levels in years because everyone was so busy.
A builders’ good fortune is often very unfortunate for those wanting to build. Many cities or departments received higher than budgeted construction bids, only to rebid the projects with reduced scopes, or they “value engineered” the project with the apparent low bidder. Some owners simply had to shelve their projects until a later time. Thankfully, 2015 was the year to bid or rebid. The “restarting” of serious construction efforts from 2014 stabilized, fuel prices lowered, and 2015 ended with a very modest cost increase of three percent, the lowest increase in six years.
In 2016, the nation experienced several impactful factors, including a number of natural disasters that consumed materials and labor with rebuilding, material costs increased due to more construction demands, and uncertainty due to a controversial election year in politics. The construction cost increase for 2016 was roughly 18 percent.
The years 2017 and 2018 both ended with sizable increases, 22 percent and 16 percent respectively. The commonly–accepted reasons for such large increases both years include; a continued building boom due to a strong economy, a number of natural disasters including hurricanes and wild fires and international tariffs or the threat of tariffs. The bidding volatility during these two years resulted in some bids that were very high, and some bids that were much lower than anticipated. This volatility made estimating bid results extremely difficult and kept some project owners from going to bid.
What to Expect This Year
So far, 2019 construction bids on public safety projects are pointing to much better results, possibly in the “normal” five percent increase range. There are still many factors that could negatively impact how the year ends, such as; natural disasters, trade wars with other nations, tariff impacts, etc. The bidding volatility still promises to be very active.
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 left-over funding.
- 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 the current bidding climate. 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 ten 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 plan wisely, do your homework and stay informed!