The following article has been modified from Elliot Christensen's "Trends in Construction 2019" article printed in the Minnesota Shopping Center Association's State of Retail Report in their Fall 2019 issue. This is the second article in a series.
Part one: Labor Shortages Continue Throughout 2019: Construction Trends Part 1
Part three: Sustainable Construction Becomes More Commonplace in 2019
Construction Cost Fluctuations Mixed
Overall, raw material costs have been somewhat stable this year compared to last year’s extreme volatility caused by the threat of tariffs. Several nonresidential cost indices have shown an average increase of over 5% per year (material and labor) for the last two years, compared to the long-term average of 3.5%. However, feedback from subcontractors and suppliers was that they are more comfortable with costs and access to material compared to last year.
Adam Dolney with DG Welding & Manufacturing said that “when the tariffs first hit, prices spiked and were all over the place, and steel availability was a concern as well. But material costs are fairly stable at this point and we have not seen any drastic changes. That should also be the case going into next year.”
Josh Humphrey with Cal-Tex Electric said that “some materials have gone up and some have gone down.” He has also seen light fixture costs coming down as LED is becoming the new norm. As material costs have gone up over the last couple of years, he has also noticed that owners are asking a lot more questions on best value and ROI for upgrades. Instead of just getting the newest gadget, they want to understand the payback of the upgrade.
According to Associated Builders and Contractors’ monthly analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index data, construction input prices (direct construction costs) fell 0.6% in August and are down 0.9% year over year. Among the seven subcategories experiencing a decline in prices during the past year, the greatest declines have been in energy related categories like natural gas, softwood lumber, iron and steel, and steel mill products.
Despite the relative stability of material costs, the shortage of skilled labor is causing overall cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. The total cost of that premium may not be included in wage reports. Labor shortages have potentially resulted in an 8% to 10% escalation in labor costs just over the last two years. Unemployment in construction, at 3.2% in September 2019, is the lowest on record. A tight labor market will keep labor costs climbing at the fastest rate in years. (EdZarenski.com)
Economy Showing Early Signs of Slow-Down
A September report from Associated Builders and Contractors (ABC) indicates that construction backlog decreased slightly in July to 8.5 months, down .3 months. “Despite the recent, albeit brief, losing streak, backlog levels remain consistent with healthy construction activity over the near-term,” said ABC Chief Economist Anirban Basu. “Contractors collectively expect rising sales to continue and are planning to add to staffing levels, though their exuberance has been somewhat tempered in recent months. If the U.S. economy continues to soften, including in the nation’s manufacturing industry, contractor confidence levels will likely continue to subside along with backlog. Yet, for now, the nation’s nonresidential construction segment remains busy.”
Per the American Institute of Architects’ monthly Architecture Billings Index (ABI), the demand for design services on commercial, industrial, and mixed practice projects has fallen from a score of 50.1 in July to 47.2 in August. The ABI gives architects a glimpse into what the construction industry will look like a little less than a year from now. When the ABI falls below 50, that means billings have decreased from the prior month and helps the industry understand where to look for new work and of what kind.
“The sizeable drop in both design billings and new project activity, coming on the heels of six months of disappointing growth in billings, suggest that the design expansion that began in mid-2010 is beginning to face headwinds,” said AIA chief economist Kermit Baker. Kathy Anderson from Architectural Consortium said that she had seen “somewhat of a slowdown over the summer, but business has picked up recently.”
Cost Control Through Collaboration
With construction costs continuing to escalate due to increased labor challenges, owners, designers and builders have been relying on more collaboration in order to keep costs reasonable and rent rates affordable. Getting contractors involved early in the process has become more popular to help with budgeting and timelines for delivery. Developers have been getting a general contractor (GC) involved at the early stages of the design process. The GC can advise the design team and owner on material selections that won’t impact the schedule and meet the needs of the owner and city requirements. “Due to the lack of available labor and material costs, we have been designing a lot more projects with wood construction and prefabricated systems with the walls prebuilt and the finishes already applied off site,” said Kathy Anderson. If involved early enough, the GC can assist with some of these material selections and provide input on actual costs and how it will impact that specific schedule.