Have you ever budgeted a year in advance for a European vacation, only to discover that airline ticket prices suddenly doubled right before you made your purchase, leaving you with enough cash to buy round trip bus fare to Truth or Consequences, N.M.? Although it’s a simplistic example, the equivalent situation happens often in construction: yesterday’s estimate may fall short of today’s prices, catching less experienced contractors – and their clients – off-guard. The result is less buying power, i.e. building potential, than was originally planned.
Pricing in the construction industry is affected by a number of factors, primarily the cost of materials, fuel and labor. These numbers fluctuate over time in response to changes in supply and demand – both domestic and international. The challenge is to make reasonably accurate predictions about future prices when estimating the costs of projects that may not begin for several months or even a year or more. In 2011, the average cost of construction materials rose about six percent, which was less than the previous year’s increase but twice the annual inflation rate. What’s on tap for 2012? Industry experts, including Sundt, agree that the U.S. construction industry will experience an average price increase of approximately five percent this year, driven mostly by international demand.
What does all this mean for builders and those who hire them? “We put a lot of time into tracking and understanding pricing so that we can effectively manage risk, both for ourselves and for our clients,” says Don Goodrich, Sundt’s director of preconstruction services. “When we serve as the Construction Manager at Risk, we work with the client to ensure that there’s an escalation line item that acts as a buffer for price fluctuations to protect our clients and their budgets. When we are competing for projects that require us and our subcontractors to go at risk for a fixed amount – regardless of what the prices are when it’s time to purchase materials – we use the data to analyze and manage risk.”
What if a contractor doesn’t factor the right costs into in its early estimates and include its clients in conversations about market volatility? That, says Goodrich, can create a credibility problem. “Construction pricing is a very dynamic process. It pays to work with an experienced contractor that dedicates time and talent to this subject, and it also helps to utilize alternate project delivery methods that provide the most flexibility and protection against the unexpected.”