31 May Because They Can

Over the last 40 years, I have found construction cycles to be fairly consistent and a good method for forecasting the construction business trends.  Coupled with leading indicators, they often will provide a clear vision of the future before it arrives.

Prices Rising

Recent increases in material pricing indicates we have reached that point of the construction cycle that prices will continue to escalate.  Supplier production capacities are maxed out and suppliers are increasing prices to improve profits.

At a recent business conference, a concrete supplier shared that they had just raised the delivered price of concrete by more than ten percent (10%) a cubic yard in several markets and didn’t feel any resistance or pushback.  We have also witnessed steel fabricators significantly raising the price per ton; however, recent Engineering News Record information reflects the prices starting to recede against that increase.

In the mid-2000s the industry experienced a similar round of increases.  The pattern established then is expected to play out again this time.  There will be significant increases in the manufactured goods.  Contractors will pass along these increases to the owners.  Moderate discounts will be negotiated by contractors during the “buy-out” phase but the net result will reflect fifty percent (50%) to sixty percent (60%) of the increases will “stick.”

Shortage of Skilled Labor

Finding and maintaining skilled construction labor continues to be problematic for subcontractors and general contractors.  Regions like the southeastern United States; specifically Atlanta, have been attracting a significant number of workers needed to complete the current local projects, causing shortages of workers in outlying areas.

Recent DRB newsletters have discussed the construction market impact of the two (2) new stadium projects and the State Farm office complex which have added over $2.5 Billion to the normal Atlanta construction volume.  It is clear from conversations with multiple subcontractors that they are having difficulty in keeping experienced crews on their projects.

Similarly, general contractors are also experiencing a lack of skilled management talent, forcing contractors to make decisions on whether to take on a project or pass up the opportunity.  Previous cycles have indicated that when contractors in this environment take on that extra project, they tend to fill project roles with recent college graduates expecting they have had the right training while moving unseasoned staff members to handle more responsibility.  This approach leads to issues with class “A” projects being managed by class “B” teams.  This situation results in project delays, budget overruns or worse, litigation.

Recommendations for Owners

Owners should review the qualifications of their general contractor and their proposed project team.  Make sure they have the experience and skills to effectively manage your project.  Since you will be awarding the project based on the presented project team, Owners should include in their contract, limitations that a contractor must obtain the Owner’s permission before making any changes in that project team.

The next phase of the construction cycle is where contractors become financially over extended. Owners should closely monitor the financial stability their contractors and pay attention to how quickly the contractor makes subcontractor payments.

Palms Place Hotel & Condo, Las Vegas, NV – Expert Witness