Construction Budgeting & Bidding in Today’s Climate – Timing is Everything!6 April 2022
As I sit here and reflect on the last several months, or even more for that matter, I am reminded that “we’re not in Kansas anymore.” As if New Jersey didn’t already have one of the highest costs of living, we are being bombarded with a “hyper-inflation” at every turn. The significant and rising cost of milk and gas is only eclipsed by the increase in lumber and steel which are the largest seen since the government began recording the data in 1949; and all are compounded by the inability to get everyday products and materials due to workforce and supply chain shortages.
For the last two years, the United States has dealt with the COVID-19 pandemic and has seen the impacts of an unprecedented government stimulus and the resulting labor shortages and supply chain issues. The Architectural industry, has long been a barometer for the Construction Industry, “If Architects are busy, construction will boom!” However, in spite of the fact that Architects and Contractors have remained busy during this time, the industry has been threatened by those issues that have continued to drive prices higher, leaving nearly all industries uncertain of what the future holds. Steve Stouthamer, of Skanska USA Building calls the setbacks from the pandemic and a “hyper-construction inflation” unique; in the past, these inflationary periods have lasted between 4 and 8 months, however we are through 12 months with more uncertainty ahead. This is perfect storm that is showing to have a magnified impact on the development costs and timelines of new projects.
Kristian Cichon of Duegen Development writes that, “the United States’ year-over-year inflation rate as of October 2021 stood at 6.2 percent and, according to JLL, construction material costs over the course of the year were up 23.1 percent, almost four times the market benchmark. Major construction materials such as steel mill products were up 123% year over year; lumber prices soared over 300% since April of 2020. Plastics, gypsum, copper and aluminum, all key elements in a project, witnessed 16 to 45 percent increases. This type of volatility in materials has been unprecedented and has led to hesitations in scheduling in order to “time the market.” We have seen many school districts, defer Referenda, and we have recommended deferring bidding to many clients in hopes that the passage of some time will stabilize these out of control numbers.
Indeed, higher prices aren’t the only concern. Materials are in short supply, attracting skilled labor has proved challenging and contractors have also faced the extra hurdles facing mandates from project owners such as schools, who often have more stringent policies in place. Some of these delays can be attributed to delays in shipping, ramped up even more by shortages in other industries, such as transportation and the ongoing shortage of truck / bus drivers.
As Architects, we are taking a lesson from Contractors and Vendors, who have had to navigate longer lead times, higher costs and tighter margins in 2021, so that moving forward we can implement contingency measures in the planning and estimating phases that would mitigate these concerns; this however, will result in escalation factors, contingencies and ultimately higher budgets. These measures are going to include a more thorough preconstruction phase, preordering materials with long lead times and adding escalation clauses which will help eliminate schedule uncertainties and provide a layer of protection when it comes to wild price swings. Turner Construction VP Attilio Rivetti noted that “with subcontractor backlog returning to pre-pandemic levels and skilled labor shortages persisting, competitiveness by vendors and subcontractors appears to be somewhat less aggressive as compared to earlier in 2021.” Given the amount of work to be completed, the backlog of projects that were deferred during the pandemic, the new projects added to the list, it becomes the law of supply and demand, contractors will continue to take advantage of the increased costs and continue to quote projects at significantly higher rates than they had previously.
The overall outlook for 2022 comes with several uncertainties amidst this volatile U.S. economy. Contractors and Owners alike will need to deal with rising costs, wages and scarce employment. While the construction boom appears to have no end in site, and contractors are holding fast to bidding higher to protect themselves, we need to adapt to these changing conditions as the ground continues to shift under our feet. Solutions Architecture will adapt as well, adjusting our budgets, planning our bidding periods more carefully, and impressing upon our clients the need for patience and flexibility in order to get the best pricing. It may be some time before things return to normal, but Solutions Architecture will continue to do what we’ve always done when faced with significant challenges; we do our best to NOT react, but rather analyze and respond in a manner that protects the client, the project and preserves the balance between getting a project done and ensuring that all expectations are met.
Frank Messineo, is a licensed architect, interior designer and construction manager, is the principal and founder of Solutions Architecture, a Verona, NJ based Architectural and Interior Design firm.