Beyond the Build

Construction Trends

Trends in Construction Costs

While our economy continues to move along, we are seeing pockets of great expansion. In other areas things are moving more slowly. In regards to the market cost, some of our customers have asked how we see things changing.

I used to think that material prices were controlled mainly by supply and demand, but that has changed in the last few years. It seems costs are now more influenced by hedge funds as much as the supply/demand imbalances.

Seven years ago, when oil got to $160 a barrel, my friends from New York said emerging markets were the drivers. This put a lot of people out of work, and the reality was that China and India were not as influential as the hedge funds and price manipulation. At the time, I vividly recall doing some projects with General Motors related companies. As the project entitlement process drug on, I did not enjoy having to go back every few months and share the news of the material increases we were enduring during that period.

This week I gathered a few of us together to discuss cost. Here is a summary of what we’re seeing now regarding construction cost, excluding the influences of the traders and investment funds.

  • As the pace of new work has increased, we have seen a steady rise in raw material cost (steel, lumber, sheetrock, etc.)
  • Most subcontractors we work with are telling us that the labor market is very tight, as many workers left the construction trades during the Recession.
  • Assuming demand remains fairly constant or continues rising, one would assume that material production will increase and therefore result in some easing of prices. However, market economics generally move in cycles and the suppliers will try to keep prices higher as long as they can. But if demand persists, new suppliers will enter the market and prices will level-off or begin to decrease.
  • Since the Recession spanned several years, the current upswing in demand may last a while, until the market trusts that there is some sustainability.
  • Labor may be a bigger driver of cost increases than materials in coming years, as it will take time to recruit and train workers.

Overall, while there have been some spikes in the various materials of 10-20% at times, I would say a total of 2-3% increase has been our average. How have post-Recession price increases affected your work?

 

Merrill Stewart Jr.

Merrill Stewart is Founder and CEO of The Stewart/Perry Company, a commercial building contractor based in Birmingham.