A Q&A (and Recommendations) Regarding the Continued Rise in Construction Costs
Image source: ENR Magazine
Just one of the tasks performed by Hixson’s Cost Estimating department, led by Mike Downing, is that of monitoring and reporting on the cost trends they are seeing in the construction industry, including many materials commonly used for construction projects.
As many of you may be aware, the past 18 months have seen an incredible shift in costs. We’ve reported on these increases in our January issue of Hixson’s Cost Trends newsletter, as well as an update via our blog this spring. Below our Cost Estimating team addresses some of the most-often asked questions they’ve received:
1. Where are costs at today? Unfortunately, the increases we saw earlier this year have continued. Some of the best examples of these increases include:
- The July 2021 Producer Price Index (PPI) for construction materials are 33% higher since July 2020.
- Costs for hot-rolled coil steel, a staple in many building materials, are up nearly 300% in the past year, while costs for structural shapes and stainless-steel sheeting are up 30% for the same period. (Source: ENR Magazine)
- Since the same period last year, the August 2021 Construction Cost Index (CCI) rose 8.8%, the Building Cost Index (BCI) is up 14.9% and the Materials Cost Index (MCI) rose 39.3%. (Source: ENR Magazine. Learn about the differences between these indices here.)
2. Why is this happening now? In Hixson’s opinion, multiple factors are at play here, including:
- Prices at this time last year were depressed due to the slowdown impact of COVID (e.g., the annual inflation rate at the end of 2020 was only 1.6%.)
- Manufacturers of construction materials and products reacted to the COVID slowdown in several ways, including closing plants, repurposing facilities, layoffs, reducing costs, etc. Now, as facilities begin to ramp production back up, they are faced with increased costs for raw materials, and employment challenges too: Employers are having difficulty finding new workers to manage the increased production, and must offer higher wages to attract those new employees (whose initial productivity will be less than that of the seasoned workers). In addition, employers are having to pay existing workers overtime to cover their production needs.
- Other factors adding to the mix: Market volatility, supply disruptions, demand uncertainty, transportation cost increases (e.g., rising fuel costs), and the continued unpredictability surrounding the impacts of COVID.
3. What does this mean for your company and any projects you have in the pipeline? This post is simply meant to help you be aware that:
- Prices are rebounding higher from last year’s lower prices that were impacted by COVID.
- Projects face increased risks for greater price fluctuations and supply disruptions, as markets adjust to the new equilibriums.
4. How long will these cost increases and supply chain disruptions last? We remain hopeful that these issues will resolve soon. One small light in the dark: Lumber saw a 400% increase over the past 12 months at its peak, but has since decreased about 60% in the past couple of months. While this is still a 50%-75% inflation from the prior year, perhaps this is a sign that things may be beginning to normalize. Of course, exactly when that will happen for other materials is uncertain at this point. In the meantime, price increases may still occur.
5. What does Hixson recommend? During these challenging times, Hixson recommends that our clients consider taking the following steps:
- Know your risk factors and develop plans to address those risks.
- Select the appropriate design and construction partners who are best able to manage these risks.
- Begin procurement earlier to account for much longer-than-normal lead times.
- Allow flexibility in design to consider alternatives to manage and minimize risk impacts.
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