Let’s face it: A contractor’s “actual cost” rises every year simply based on the need to increase wages and pay more for material, insurance, licenses, equipment, etc.
That said, many of our clients have endured an unprecedented escalation in construction costs in recent years due to the pandemic. The “triple whammy” that resulted in double digit annual increases across the country was primarily attributable to; i) supply chain material increases and delays, ii) significant wage increases needed to attract and retain workers, and iii) unabated new demand in several markets as a result of outsized population migration.
We now see that our material suppliers have hit their stride again, corporate and individual relocations have slowed, wage increases have flattened and higher interest rates have curtailed demand (in some markets). Logically, our clients are now wondering why construction prices have not decreased in the same way that commodity prices (like lumber) have.
The answers are simple:
1. Labor costs are roughly half of construction costs. When wage increases occur, they never go back down. They only stay flat or go up. In some markets, construction wages have increased 30% or more since the pandemic started. No one believes those wage rates will return to prior levels.
2. Prices for certain raw material may have decreased, but overall, material prices for all components that go into a construction project have not really decreased to any significant degree. Manufactured products still rely on a significant labor component and those workers continue to command higher wages given the scarcity of workers in many markets.
3. Insurance costs continue to rise faster than the rate of inflation.
4. Demand in many markets is still strong. No question the marketplace has shifted, as capital flows decrease toward office and multifamily projects, but investment in infrastructure, industrial, data centers, hospitality, healthcare and education have increased.
Certainly, there are regional disparities to these dynamics, as the Northeast and Upper Midwest of the country have a significant excess capacity of workers while, the Southeast and South continue to have high demand, and therefore no need to lower prices to secure work. No question, we are seeing some “good buys” being made in certain markets. However, over time, these geographic differentials only go so far as to dampen the rate of increase in construction costs versus significantly lowering pricing in a particular market.
Should you have any questions, please feel free to reach out to us for more insight.
