Simply put, it is harder than ever to predict the price of bids received on bid day. The construction industry is experiencing an unprecedented level of market volatility, and when you consider the full picture, it is likely to continue into next year.
As independent estimators working on the front end of projects, it is our responsibility to understand current market conditions. We must assess key factors affecting construction, interpret how they might impact a project, and communicate with our partners so they can make informed decisions.
Many things are at play, but these five stand out from conversations with our industry trade partners.
1. Material Escalation
The cost of many materials skyrocketed from the pandemic’s effects and then kept rising. While material cost increases are not abnormal in the industry, one long-lasting consequence exists even as some of those material costs are coming back to earth; subcontractors got burned!
In normal times subcontractors prepare their bids based on current material prices, submit them to general contractors, and if they win the bid, contracts are awarded fixing those prices.
Today, material costs are changing rapidly, inventories are low, and suppliers will not hold their prices long enough for the normal bid-contract-procure cycle. Rather than honoring their prices, they continually raise them throughout the life of the project.
During the first wave of this circumstance, subcontractors had to absorb the cost increases because they had no avenue for relief. During the second wave, they told general contractors of the predicament and that their bids would have to be adjusted. However, when the time came for subcontractors to ask for relief, they were either ignored or denied, resulting in additional losses.
Now what we see is a subcontractor community conditioned to price all potential escalation into their bids to reduce risk. They must do this to keep their doors open.
2. Manufacturing, Shipping and Delivery
If it’s manufactured, you will have a long wait. Structural products like steel joists and metal decking needed early in the project, have taken more than 6 months to procure, though this continues to improve. Mechanical equipment and electrical gear can take up to a year. Sometimes that’s longer than the duration of the project. For mechanical and electrical subcontractors, it’s become the norm to experience slipping commitments from suppliers, and when they get equipment, parts and components are missing. Faced with this new reality and being held to project timelines, they mitigate these risks by passing on more jobs or increasing their bids.
3. Labor Shortage
The industry faces a labor shortage, and it’s not going to get better any time soon. For years now, the U.S. has been in an economic situation where all available labor resources are used in the most efficient way possible. Said another way, we have been at or near full employment for a long time now. To make matters worse, the U.S. birth rate has fallen 20% over the last 15 years. So, we don’t have enough workers for the economy today, and we are not birthing new workers for the economy of tomorrow.
Now consider that the construction industry took a big hit during the Great Recession of 2007/2008 — 2.3 million construction workers were lost due to layoffs. Many headed for greener pastures like the oil fields in North Dakota, and never returned to construction.
The following years did not produce a slew of young, eager, and hard-working replacements. Instead, schools, counselors, parents, peers, and society at large encouraged them to do anything but construction.
Then the pandemic hit and shut down the world, forcing another round of once-in-a-lifetime scenario of layoffs. Again, workers headed for greener pastures.
Bidding a job today for most specialty trades is like planning a car trip across the state with a half tank of gas. They don’t have enough gas. Their business model has changed, and they are adapting. Without the availability of labor resources, subcontractors will bid fewer jobs at higher margins.
4. Decreased Labor Productivity
Compounding the issue of not enough workers in the first place, is the effect of their skill level, or lack thereof. Construction is a labor-intensive industry that requires both non-skilled and highly skilled workers. Today, it is disproportionately non-skilled.
Think about the older generation of tradespeople who have been around a long time and earned real journeyman status. They have been retiring out for many years now.
Think about the younger generation. If they enter the trades, it’s mostly a short-term gateway to something else. They are not in it for the long term and never reach journeyman status. They also expect too much too fast in an industry that requires years of on-the-job training. While at work, they are distracted with technology…smart phones. It’s common to see today’s workers on their phones, texting or listening through earbuds. This removes them from being present and directly impacts field productivity.
For generations, businesses have established productivity standards set by a workforce that doesn’t exist today. We now must adjust, first due to lack of skill, and second due to inefficiency caused by smart phones on the job site. Our trade partners are throwing out the number “easily 25%” for what they see today. It’s almost a unanimous “it’s terrible” right now.
Consider that labor cost is typically 40% of the total project’s budget. On a $1M contract, $400K is labor. Adjusting those costs upward by 25% is an additional $100K. That’s a 10% increase on the overall contract!
5. Risk, Risk, and Risk
In today’s market, all the above come into play when a bid is compiled. Then, when contractors start asking questions, additional costs are added to final bids. Do we have the manpower? Do we have skilled people to get it done? What are the lead times for the specified materials and equipment? What is the schedule? Are there liquidated damages? Is the owner willing to work with us on these challenges?
These might seem like obvious questions that get asked upon summarizing every bid, and they should be. However, unique today are the answers you get and the willingness to take the risk.
As cost estimators, we will continue to analyze the data and have conversations with our partners at all levels to understand pricing better and inform our clients as we operate in this unpredictable market.