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Why construction costs are on the (exponential) rise

Well before new construction projects break ground, we at Marx|Okubo are often asked to get involved in order to better and more proactively inform owners and lenders. We see a wide range of documentation on nearly every project, ranging from drawings and schedules to contracts and leases and more—one of which is a construction budget. Often, we look at a budget based on early documents and are then, months later, asked to re-look at it when the project is getting closer to the start of construction.

Almost invariably, the closer we get to construction, the more the budget increases. Clients always ask the obvious question: Why are construction costs so high and only getting higher?

Well, here are some of the drivers of rising costs:

Scarcity: These days, a contractor with an open schedule is a hard thing to find. Everyone who wants to work is working, and there is little incentive to price things lower to build backlog. The established, reputable contractors know that you make hay (concentrate on executing the high fee work) when the sun is shining. And right now—it’s shining.

Labor costs: Contractors are constantly complaining about the shortage of skilled labor. Where did all the workers go? During the last recession (2008-2010), many construction workers were unable to find work and, subsequently, changed career direction to something more stable. Another quiet drain on workers, impacting subcontractors’ ability to assemble teams, has been tightened borders and a focus on immigration enforcement. In many areas of the country, construction trades are largely Hispanic with a percentage working with falsified or missing documents. All these factors work together to drive up costs.

Material shortage: Contrary to popular belief, you cannot find all the pieces and parts to build your next project within a 10-mile radius of your job site. Recently we have seen shortages in drywall, lumber, roofing and other materials because much has been diverted to address hurricane and flood recovery in Florida, the Carolinas and Texas. And unfortunately, manufacturers have a limited ability to ramp up production when they are already running their production at 100 percent. Material scarcity means rising costs.

Tariffs: Tariffs and even the threat of tariffs have been one of the biggest impacts on construction costs over the past 12 months. Regardless of the issue’s politics, the impact is undeniable. Steel, aluminum, lumber and finished products of all kinds have been made costlier by the tariffs imposed or threatened by the Trump administration. Counter to what many owners believe, they often have no safeguards from the issue, as changes in tariffs are often written into contracts as a “force majeure,” rendering any protection ineffective, and then the contractor can pass along cost increases direct to the owner. Ouch!

Capitalism/Economics: In a market economy, costs fluctuate based on demand, and demand is at record levels. We are in the tenth year of a record recovery in construction, and many people cannot remember when things were slow. If you are and you think you are always going to be busy, you tend to price services less competitively.

So, what can an owner do? Smart owners know all the factors highlighted above. Smart owners also know solid research and preparation can minimize (not reverse) budget damage. Proactive steps include:

  • - Conducting detailed budget estimates early in design
  • - Engaging contractors to provide real world expertise on cost drivers
  • - Establishing a healthy and appropriate contingency keyed to the project's stage in the construction process
  • - Developing a strong and empowered project management team that understands how to push back when it is appropriate.

If you are concerned about rising construction costs and want to evaluate/solve this issue for specific projects or for best practices, Marx|Okubo can help keep you more informed and your project costs more efficient. For questions or project inquiries contact gary_cohn@marxokubo.com.