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By Duane Craig
June 19, 2017
You can expect construction input costs to rise more than 4% in 2017. March numbers revealed a 4.4% increase on a yearly basis, according to the Associated Builders and Contractors. Mortenson, a construction and development services company, predicted nonresidential construction costs would go up between 3% and 4.5% throughout the year. Leading the pack are labor costs, expected to grow at 3% to 4% in 2017, as well as flat glass and fabricated metal.
To gauge executive sentiment on the future direction of construction input costs, IHS Markit surveyed its Procurement Executives Group for the Engineering and Construction Cost Index. That index was up in April for the sixth month in a row, indicating widespread agreement that future costs will continue their upward trend.
It’s important to note that generally construction economic forecasts tend to be more optimistic than what actually happens. For example, economists were predicting little to no growth for input costs in 2016, but a recent report from Ryder Lovett Bucknall pegged construction costs at over 5% for the year. The company tracks more than just the costs of commodities and includes overhead costs, fees, and construction-related taxes. The bottom line on forecasts is to use them as a starting point for anticipating the direction of costs.
If you’re bidding a project today, and the expected start date is in 2017, consider increasing your estimated input costs by about 1% for each quarter in the future. Also, check your sources of supply for all critical materials on upcoming projects and assess their availability. If necessary, look for alternate suppliers, or try to lock in guarantees with your current suppliers.
At the top of everyone’s mind are labor availability and costs. Predictors tend to agree that these costs will increase between 3% and 4% during 2017. Any labor shortages will also affect overall costs in other ways. For example, when companies hire less experienced people to fill in their ranks, they will take hits to productivity as workers get up to speed. Mistakes leading to rework and increased accidents are other ways a less experienced workforce can drive up costs.
Political and economic factors also affect building costs. Stricter immigration policies are spawning localized laws that affect available labor and in at least one case, increase the costs of finished projects. Zillow research reported that after a Georgia immigration law was enacted, new homes in the state increased in cost by almost 19%, while homes across the nation increased 5.4%. Pay attention to legislative actions in your own area and assess their effects on your operations. Also pay close attention to who is supplying labor to you and to your subcontractors. Be sure they are complying with immigration laws.
There is also the ongoing drama surrounding trade agreements. This is creating uncertainty for construction materials producers.
On April 24th the U.S. Department of Commerce placed a 19.88% duty on Canadian softwood imports and hit certain lumber producers with even higher tariffs. The Department of Commerce might also levy anti-dumping duties on Canadian softwood imports, a decision due late in June. These added tariffs are expected to be appealed to NAFTA and the World Trade Organization, so their fate is uncertain. Lumber consumption is closely tied to the housing market in the U.S. as its demand tracks very closely with housing construction, according to AxioMetrics, provider of housing market analysis.
Canadian lumber accounts for about 26% of total U.S. lumber consumption. To illustrate the trade differences, Canada imports almost 71% of its wood products from the U.S. The use of Canadian lumber in the U.S. is spotty. Two states, Washington and Texas, consume the most Canadian softwood: 8.3% and 5.8% respectively. Other top users include New York (3.7%), Michigan (3.4%), Oregon (3.3%), Pennsylvania (3.3%) Massachusetts (3%), Minnesota (2.9%), North Carolina (2.8%), and Illinois (2.7%).
The effects of high tariffs on Canadian lumber would be felt most in the states using the most product, but even then, it will be highly local and is not expected to have a significant impact on the housing industry. That’s because lumber is not a major portion of new housing costs, and is only in demand relative to new housing construction.
But uncertainty is already pushing lumber prices up. The NAFTA agreement on softwoods has been in limbo since late 2016, so U.S. lumber producers have pumped up their prices. Construction trade groups said that has added $3,600 to the price of new homes. Look for softwood lumber issues, and the resulting price volatility, to continue at least through 2017, or until stability returns to trade agreements. In the event of a trade war with Canada, you could expect big cost increases on building materials you get from them. These could include not just raw commodities, but finished products as well. Assess your vulnerability and consider your options.
Because labor is leading the charge on rising input prices, and because it accounts for about half of the cost on any project, here are other tactics for staying in front of rising labor costs.
Do a highly conservative assessment of your available labor. That means factoring in what you know about your employees. Is someone dealing with health issues, or those of a relative’s? You need to expect that people with increased personal demands won’t be fully available.
What about those close to retirement? How many are there, and are they planning on retiring soon? Find out, and then consider if you will fill their vacancies, and how. Similarly, consider your lost time rate. Even though you’d like it to be zero, you still need to have a backup plan should any of your key employees be down for injury or extended illness.
A majority of construction companies don’t have career progression outlined for their employees. If employees don’t know you have formal plans they can follow to advance through the ranks, they might assume there is little opportunity for advancement. Find out which employees want to move up, and provide a way for that to happen. More importantly, make sure they know about it. The first rule in dealing with labor shortages is not to lose any current employees.
Training is another often overlooked tool for overcoming skill and employee shortages. Assess the skills that are in short supply and consider ways to implement training to overcome them.
No doubt, one of the major reasons so many general contractors have been subbing out more and more of the work, is because of the workforce shortages. You can also consider subbing out more work, but be careful. While the solution might just be short term, you are simply passing the problem down to another party. Make sure the subs you hire also have their own plan in place for keeping and attracting talent.
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