Overcoming Construction Inflation
By Donald. B. Smith Jr.

Donald. B. Smith Jr., President of Conewago Enterprises, has developed a well earned reputation as an innovative leader within Central PA and the national construction industry. Upon graduating from Widener University in 1991 with a Civil Engineering degree, Don set about transforming Conewago into a nationally lauded design build and general construction company. With great foresight, he built a 325 person team, and 165,000 sq. ft. of manufacturing facilities to support the precast concrete, ready-mix, and steel fabrication capabilities that fuel Conewago’s superior growth. You can reach Don at dsmithjr@conewago.com or 717-632-7722.

The past eighteen months have provided businesses and investors with a golden opportunity to invest in existing real estate and build new – perhaps even a once-in-a-lifetime opportunity. Unfortunately, great investment moments come to an end, and the prospect of increased costs is the issue now facing our industry.

Construction inflation comes in many forms. Over the past three months we have seen crude oil prices reach an18-month high; dealt with a 34% increase in diesel fuel over the prior year (May 2010’s $3.20 vs May 2009’s $2.38); and seen liquid asphalt increase 21% over May 2009 prices. Energy cost increases not only affect petroleum based materials, but the manufacturing process and freight costs as well. The accompanying graph illustrates that we remain in a sustained period of high crude oil prices  (Table 1).

Purchasing managers’ reports indicate that so far in 2010 price increases from 2% to 15% have occurred in plastic, copper, brass plumbing supplies, drywall gypsum board, metal studs, roofing shingles, and steel pipe fittings. Steel prices are nearing the pre-recession levels of 2004-2006. Steel production and capacity are clearly behaving as though a “V”  recovery is underway, as seen in the second graph (Table 2).

Strategies To Overcome Construction Inflation In Today’s Environment

A. Delivery Method:
Design-build puts the owner at the table with the construction company and the team of professionals they have assembled.  It has been our experience that design-build projects have great budget integrity, are not over designed, and have well developed schedules. In economic times like these it is even more important to have an aggressive delivery schedule to beat any potential inflation that is lurking around the next fiscal quarter.

B. Fixed Price:
If the output under your delivery method is correct, the use of a fixed price contract minimizes, and in many cases, eliminates change orders. The biggest single concern for owners is projects going over budget due to change orders. If the cost is fixed then the contractor must focus on creating value rather than maximizing project revenue through change orders.

C. Alternative Construction Techniques:
In times of rapid or significant price fluctuations in materials, contractors are closer to the pulse of what’s happening in the industry. This is especially true if the contractor has the ability to self deliver up to 60% of the project, since their organization will have a better handle on market conditions across the construction spectrum. A designbuild contractor can offer alternatives such as brick veneer set in precast concrete panels as a good quality, cost-efficient alternative to combat rising labor or material costs. Another example is tilt-up concrete construction, which offers great labor savings and allows for a well-built project to be completed with an aggressive schedule that saves carrying costs.

In conclusion, most professionals I am in regular contact with are concerned that inflation is creeping back into the construction industry. Labor inflation remains subdued due to current unemployment levels, but this is the only aspect of construction not affected right now. As the industry looks for ways to manage costs, there is growing interest in Integrated Project Delivery® (IPD). Similar in structure to design-build, IPD brings together contractor, architect and owner as a fully integrated team throughout the construction process, sharing both risks and rewards. IPD’s increased owner involvement has the potential for lessening waste, inefficiency and conflicts, thus contributing to overall project savings.