Tightening of Subcontractor Market

Several of our projects are currently going through a bidding process.  Interestingly, we are getting feedback that many subcontractors are already near or at capacity, forcing them to be more selective in the projects for which they offer proposals.  We have heard reports that several subcontractors have already suspended pricing for additional work until next spring. This is about two (2) months ahead of what we expected.

Additional questioning confirmed our expectations of tightening of subcontractor market. During the economic downturn, as expected, many contractors had reduced their staffs to remain in business.  These reductions in staff continue to limit the trade contractors’ work capacity.  Normally as the work levels increase, trade contractors expand their staffs to meet the work requirements.  We are learning that some trade contractors are taking a different approach.  They are working with current resources to maximize capacity, which enables them to rebuild their cash reserves and generate a stronger balance sheet.

Another factor to consider in determining the amount of work a subcontractor or contractor can take on is its bond capacity.  The last five (5) years have significantly impacted many contractor balance sheets, limiting their ability to expand as the recovery expands.

Additionally, the work force has been depleted as many tradesmen have left the construction field for other employment.  This reduction in skilled craftsmen will cause many firms to take on lower quality workers and train them only to acceptable levels.

These factors will drive construction pricing up, as firms will no longer need to take work at the recent low prices.  Competition for work still exists, just not at the pricing levels of the last two (2) years.

One final thought to mention is the search for great talent.  Recruiters are telling us that their business volume is increasing and focused on key talent for the upcoming construction boom.  This increasing labor cost structure will have to be factored into construction pricing.

Actions to be taken

Since we continue to see inflationary pressure for construction pricing, we recommend the following:

Project Owners – you have a key opportunity in that lenders are offering funding for construction and design firms, and contractors are at their initial phase for price increases.  Therefore you should secure your construction loans as early as possible and negotiate your construction contracts with design and construction firms now to lock in fees.

Design Firms – now is the time to raise your fee structure.  Capturing the work at the higher rates will drive more profitability to the firm.  Higher wages will be required to maintain key talent through this next cycle of Design and Construction.  Raising prices after securing contracts will not be easy and your best people will be tied up providing services at a lower fee, or worse will be lured away by other firms.

Contractors – we already see material prices increasing.  We suggest locking in long-term pricing from your key commodity suppliers (concrete, steel stud, drywall etc.).  Prepare your project owners for price escalation by including an inflation factor in your negotiated project bids.