Managing the High Costs of Construction Projects in Today’s Economic Environment
Anyone visiting Home Depot for a DIY project, large or small, has surely noticed the increased cost of building materials. Not surprisingly, the post pandemic impact on commercial construction projects has been significant. In an environment of increasing material and labor costs, partnering with an experienced, trusted team is more important than ever.
All signs and trends suggest that we are not going to see significant reductions in construction pricing. While cost increases seem to be stalling, nothing short of a very deep recession will create sufficient downward pressure on construction prices to have a meaningful impact. For that to occur, demand would need to plummet for a protracted period. We would have a host of other problems perhaps far worse than the inflation we are experiencing now.
Here is snapshot of the prices of a few commodity construction items before and during the pandemic:
A 4’0 x 9’0 sheet of ½” Drywall
- Pre-Pandemic: $8.28
- Market High: $16.96
- Current: $16.96
A 2×2 Piece of Armstrong Dune – Mid Grade Acoustical Ceiling Tile
- Pre-Pandemic: $4.72
- Market High: $11.60
- Current: $8.89
#12 AWG Solid Copper Wire per 1,000 lf
- Pre-Pandemic: $95.00
- Market High: $200.00
- Current: $165.00
These are just a few items common to many commercial projects. The impacts are similar across practically every element of every project.
Material costs are only a portion of what goes into any commercial construction project. On average the ratio of labor to material is approximately 30-40% labor, 60-70% material. There is no indication that labor costs may come down in the near future with construction job openings increasing nationally by 129,000 between January and February 2023. If we assume no price reduction will come from labor, that means that managing material costs is even more important.
Given increased material and labor costs, what can we do to make a construction project as cost-effective as possible?
The increased demands on getting prices down places increased importance on partnering with your contractor and design team.
Creativity & Experience
Perhaps one of the most overused terms in the industry is the famous VE, or value engineering. Delivering the “same” for less money takes creativity and experience with options available. Getting contractor input early gives a creative partner a chance to steer you to affordable solutions up front. A good contractor can still value engineer a completed design, but there will be fewer opportunities for flexibility, and an owner may have fallen in love with an approach or specification without realizing the cost implications.
The high cost of new construction is pushing owners to consider adapting buildings previously designed for a different purpose. We are seeing this in all facets and markets be it office, retail, industrial, healthcare and religious. This approach can add some complexity but the value obtained from not building entirely new can be well worth it. Working with a team that understands your goals and has experience with a wide variety of projects and the rules and restrictions around them will put your project in a better position.
Those seeking real estate for commercial purposes will be more apt to find existing, vacant spaces that roughly satisfy their needs OR choose to stay put, reorganizing and renovating their existing space. The pitfalls of an occupied renovation are obvious. Construction disruptions can take a toll on an organization if not properly planned, staged and orchestrated. The increase in work-from-home options perfected during the pandemic can help create large work phases without needing swing space to temporarily house staff. The key to a successful occupied renovation is a contractor partner that takes the time to work with you, build a plan, manage and meet expectations.
These current economic realities for both labor and materials require thoughtful approaches and a strong partnership between owners and their general contractors and design teams. Successfully keeping a project on-time and on-budget rely on managing the economic realities in a proactive and thoughtful manner. So, be selective about your general contractor and look for a partnership that demonstrates creativity and experience that will help you navigate this current new reality of higher material and labor costs.