Contractors Discuss Rising Construction Costs

Thu December 05, 2019 - National Edition #25
Irwin Rapoport – CEG CorrespondEnt


Construction costs are on the rise.
Construction costs are on the rise.

General contractors and subcontractors across the nation are witnessing increases in construction costs, be it for department of transportation contracts or commercial, industrial, institutional and residential projects. While some companies, due to their size and geographical range, have been aware of the trend from the beginning, others are dealing with it on a case-by-case basis and are seeking data to confirm their suspicions.

"If you think construction is getting more expensive, you're right," Ken Simonson, chief economist of The Associated General Contractors of America, told Construction Equipment Guide. "The Bureau of Labor Statistics (BLS) compiles a producer price index (PPI) that measures the change in what contractors say they would charge to put up a set of specific non-residential buildings. By asking the same contractors about the same set of hypothetical buildings each month, BLS is able to compare ‘apples to apples.'

"The PPI for new non-residential building construction increased 5.6 percent from August 2018 to August 2019," he added. "In contrast, the consumer price index (CPI) — the most commonly cited measure of inflation as experienced by consumers — increased only 1.7 percent over that period. Over the past three years, when construction costs began to accelerate, the ‘bid price' index has risen 13 percent, while the CPI climbed just 7 percent."

According to Simonson, construction costs have been driven by an acute shortage of hourly craft workers and by tariffs on steel, aluminum and other construction materials and components.

"A survey conducted by AGC of America and Autodesk this summer found that 80 percent of the nearly 2,000 responding contractors reported difficulty filling hourly craft positions," he said. "In addition, 57 percent reported the same for salaried positions. Nearly as many firms expect the difficulties to remain or intensify over the coming 12 months. Removal of tariffs on Canadian and Mexican steel and aluminum, along with softening in demand for materials from automakers and other manufacturers, has caused materials costs to flatten recently, but labor-related costs continue to increase. Those costs include not only higher base pay rates (reported by two-thirds of the firms in the AGC survey), but greater expenses and longer times for recruiting, training and overtime. As a result, 44 percent of respondents say their firms have put higher prices into bids or contracts and 29 percent are quoting longer lead times."

This analysis was provided in response to comments from Shawn Massey, CCIM. CRRP, ALC, a partner with the Shopping Center Group, noted that construction costs in the Memphis, Tenn., area and the Southeast in general have risen by as much as 18 to 25 percent due the ongoing shortage of construction workers, increases in the price of materials and impacts of hurricanes, flooding and other weather-related factors.

"During the last 18 to 36 months we have seen a drastic increase in our construction budgets that were unaccounted for based on historical numbers and reasonable inflation or contingencies," Massey said. "Besides the labor shortage, natural disasters in Texas and Florida have driven up the cost of construction materials for sheetrock and other materials. The booming economy has an effect that workers can choose which projects to work on and thus projects that can afford more get the workers. Some deals will never get done as rents required to justify new construction pricing are simply not there."

Simonson, in the Sept. 13 edition of the AGC Data DIGest, provided the latest statistics regarding PPI based on an AGC analysis of PPIs that the BLS posted on Sept. 11.

"Compared to August 2018, the PPI for new non-residential building construction — a measure of the price that contractors say they would charge to build a fixed set of buildings — rose 5.6 percent," he wrote. "Increases ranged from 4.2 percent year-over-year (y/y) for new healthcare building construction to 4.8 percent for office buildings, 5.6 percent for warehouses, 6.6 percent for industrial buildings and 6.9 percent for schools.

"Increases in PPIs for subcontractors' new, repair and maintenance work on non-residential buildings ranged from 2.4 percent y/y for roofing contractors to 5.6 percent for electrical contractors, 5.8 percent for plumbing contractors and 7.2 percent for concrete contractors," Simonson added. "In contrast to these output prices, the PPI for inputs to construction —excluding capital investment, labor and imports — edged up only 0.4 percent y/y, a sharp deceleration from the 6.4 percent increase one year earlier."

The index also covers goods (56 percent) and services (44 percent), and it found that the PPI for energy inputs to the construction sector fell by 13 percent y/y, while non-energy goods inputs increased by 1.3 percent y/y. Regarding the index for services inputs, it increased 1.9 percent y/y.

"Price increases turned negative for some previously fast-rising inputs such as diesel fuel (down 18 percent y/y, following a 35 percent jump a year earlier), lumber and plywood (-12 percent y/y, following a 6 percent rise); steel mill products (-11 percent y/y, following an 18 percent gain); gypsum products (-8.4 percent y/y, following a 7.5 percent rise); and aluminum mill shapes (-5.2 percent y/y, following a 15 percent gain)," Simonson wrote. "In contrast, the PPI for architectural coatings rose 6.5 percent y/y vs. 4.7 percent a year earlier."

In the Aug. 27 edition of the AGC Data DIGest, Simonson addressed the labor shortage, citing data garnered by the Autodesk-AGC of America 2019 Workforce Survey, which gathered information from 1,935 respondents.

"Filling craft positions and some salaried positions remains as great a challenge for contractors as it was a year ago," Simonson stated. "Ninety-one percent report their firms plan to hire hourly craft personnel in the next 12 months for expansion (19 percent) or replacement (72 percent), close to the 93 percent who said the same in the 2018 survey. But 80 percent stated they were having a hard time filling some hourly craft positions (same as in 2018). In addition, 57 percent said they were having a hard time filling some salaried positions (vs. 56 percent in 2018), while 12 percent reported no difficulty and 32 percent had no openings.

"For all but one of 20 specific craft positions listed in the survey, at least half of respondents whose firms employ that craft said filling positions was harder than last year. The sole exception was painters, with 49 percent of respondents saying they were harder to find than last year. The hardest craft positions to fill were concrete workers, reported as harder to fill than a year ago by 69 percent of firms; pipelayers reported by 66 percent; carpenters, equipment operators and cement masons, each cited by 65 percent. For each craft, fewer than four percent of respondents said filling the position was easier than last year, while seven to 20 percent said they hired without difficulty."

Regarding the 10 salaried positions that were studied, 48 percent of respondents said project manager/supervisor positions were harder to fill than last year. For engineers, it was 37 percent and 33 percent for environmental compliance professionals.

To secure more hourly craft workers, more firms when compared to 2018 increased base pay rates due to the difficulty of filling positions. Engaging in career-building programs as a means to increase the labor supply of firms rose from 48 to 50 percent. In a bid to find executive and non-craft workers, 29 percent of the companies called on the services of search firms, the same as in 2018. This was also done to secure craft workers, although there was a five percent decrease to 27 percent.

"To replace workers or skills, 29 percent of firms invested in technology to automate processes to supplement worker duties; 24 percent used labor-saving equipment (e.g., drones, robots, 3-D printers, laser- or GPS-guided equipment); and 23 percent used methods to reduce on-site worktime (e.g., lean construction, virtual construction or offsite fabrication)," wrote Simonson, who also noted that "nearly half of respondents said projects have taken longer (44 percent) and/or costs have been higher than anticipated (43 percent), while 44 percent have put higher prices into bids or contracts and 29 percent have put in longer times."

General contractors from various regions were contacted for their reaction to the data, and they confirmed the situation facing the construction sector.

"As a mechanical subcontractor, we represent a large portion of the overall labor force on a given project," said Bruce W. Tibbetts, president of Virginia-based EMC Mechanical Services. "Labor costs over the last year have increased steadily, adversely affecting our existing backlog. We experience schedule compression on almost every project we are involved with. All it takes is for one trade to fall behind schedule on a given project and from there is a domino effect for the entire project team. We are working to pre-fabricate more of our work off site to help get ahead and/or keep pace with-out the cost of overtime and too many hours in a given week for our workers."

Tibbetts noted that pricing for materials over the last year has been up and down, especially with continuous talks around tariffs.

"It has become standard practice to add a contingency line for material/ equipment increases," he said. "We try to stay in constant communication with our suppliers, but even the short-term swings are hard to predict. Going forward, owners and contractors need to agree on a way to share the risks, otherwise we will have to put in higher reserves."

Asked how his company's private sector and government clients have reacted to price increases, Tibbetts replied: "This varies greatly across the board. With some local, state and county agencies we are finding that they understand that labor shortages have a direct impact on the eventual project delivery schedule."

Bill Fetters, vice president of engineering/estimating with Philadelphia's Buckley & Co. Inc., noted that the increases are taken into account at the planning level.

"We are heavy highway contractors and mostly bid to government agencies — the Pennsylvania Department of Transportation and the city of Philadelphia — where indexes are provided for steel, asphalt and fuel, and that offers some protection," Fetters said. "Most of our commodities — concrete and rebar, outside trucking, etc., are relatively predictable. Theoretically our competitors have to deal with the same issues, so we see it as a wash. We are a union contractor, and our field supervision reports that there have been problems obtaining dependable skilled labor for short notice production pushes. This is being offset by having our crews put in more overtime hours.

"After a completive bid is awarded, we try to lock in prices by having subcontracts and purchase orders expeditiously prepared and executed," Fetters added. "This provides some protection. However, there is the occasional specialty item which can bite you. Recently, a resin-type concrete mold jumped 15 percent in a year purportedly due to regulatory issues."

The government agencies that Buckley & Co. deal with tend to express surprise when they open bids and the prices are higher than their engineers estimate, Fetters stated. So if they're successful, Buckley & Co. has to perform pre-award justifications for re-budgeting purposes.

Katie Haydon Perry, director of organizational development with Haydon Building Corp., Phoenix, Ariz., participated in AGC of America discussions about the cost increases.

"The Phoenix metro area and Phoenix-Tuscon area economies are blazing, and there's so much work here that we strategized to keep the bulk of our work in Arizona so we can keep our guys working close to home," Perry said. "The increase in costs means decreases in profit and that's been the biggest shift for us. Really getting creative is important. We have people who think outside of the box that are looking for ways to do things in a more cost-effective way.

"Increased wages and salaries mean we have to be more cognizant of what overtime looks like," she added. "Schedules are tighter and we have a lot more overtime hours being logged. This is being factored in from the beginning, especially with scheduled pushes and big pushes at the end of our projects. We want to make sure that we stay inside that budget. It's a challenge and it forces us to be better."

The labor shortage is a "big issue" for Haydon.

"We have less skilled personnel on our staff, which means more oversight and training is needed for new people, which also means more constraints on our superintendents and upper level management," Perry said. "We've increased our hiring process, including a panel for salaried people. We do more extensive training from day one because a lot of times we're getting people who've never done construction before as our industry pays higher than most entry-level positions."

With all the advanced technology entering the industry and use of more sophisticated equipment, foremen often have to "hand hold" new Haydon employees as they become familiar with the tools.

"We have to make sure that new guys really understand the implications of their decisions and how they affect the whole team," Perry stated.

On prices for materials, she explained that Haydon has looked at different material types and methods to reduce costs. Reinforced concrete channel, concrete and rebar increased in price by about 25 percent. The company used value engineering to design a soil cement channel reducing overall cost by 40 percent, which also helped reduce the amount of labor required.

Price increases are causing budget stress for the firm's private sector and government clients.

"During programming we are providing multiple phasing options so they can build what they can afford now and have options to complete as the dollars become available in the future," Perry explained.

The Ohio-based Rudolph Libbe Group has seen construction costs increase somewhat more than the cost of living index, but has not seen owners delaying or cancelling construction projects as a result.

"There's no way to predict the future, but interest rates are still very competitive, and the economy continues to be very solid so owners tend to keep moving forward with projects," said Jeff Schaller, vice president, preconstruction operations, Rudolph Libbe Inc. "This business climate is requiring everyone to be more proactive when it comes to staffing and planning projects. When owners involve us in the earliest stages of project planning, we have the best opportunity to help control and monitor cost as much as possible. Those who don't can be very surprised when costs are higher than expected after the design is complete."

Nor has the labor shortage affected the company's pursuit of projects.

"We always take into account manpower availability when we qualify or select opportunities, and that's true regardless of construction job market conditions," Schaller said. "We encourage owners to commit on projects as early as possible so we can plan staffing well in advance. As self-perform union contractors, Rudolph Libbe Inc. and GEM Inc. have the advantage of a large pool of local trade labor, which helps us through periods like this. We pride ourselves on being a preferred employer with a strong commitment to providing safe working conditions, current equipment, technology and training."

"We have a very talented and committed labor force, and we use them to the fullest extent," said Ron Donnal, vice president, business development, GEM Inc. "Having the best local field supervision is a key to the success of our projects."

Rudolph Libbe and GEM have apprenticeship programs for all the trades they hire — carpentry, masonry, cement finishing, operators, boilermakers, ironworkers, electricians, pipefitters, plumbers and HVAC technicians.

"We are very active in high school career training programs in our area and we've hired many graduates," Schaller said. "We participate in college recruitment programs and community-based job fairs."

The companies also are very involved with the AGC and The Association of Union Constructors.

"These two organizations are working diligently to address the workforce shortage," said Donnal.

Working early on with owners also pays off in regard to material cost increases. According to Schaller, this provides the ability to incorporate value-engineering so the companies can make sure the most effective materials are used. That allows for lock-down pricing so they can minimize unexpected cost hikes. These sorts of proactive measures give owners the confidence to proceed with their projects.

"Owners are becoming increasingly interested in project delivery methods that let us more effectively manage projects, such as design-build, construction management and hybrids," Schaller said. "That's where the savings are." CEG