Understanding The Changing Marketplace: Labor & Material Costs

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Bob Dylan said it best: “The times they are a-changing.” They certainly are in the construction industry, particularly with regard to skilled labor availability and material costs. Construction projects throughout the country are at an all-time high and volume is expected to remain on an upward trend for the next three years, growing at 0.4% per annum (based on 2009 nominalized dollars, labor and material costs). All of this will play an important role in projects currently under construction, as well as those slated to begin within the year.

Construction Skilled Labor Shortage

In a recent survey conducted by the Associated General Contractors of America, it was determined that 1.93 million construction workers have been added to the workforce since 2012. However, 70% of all general contractors today are still struggling to hire skilled labor for their current projects, with carpenters, bricklayers and electricians in the highest demand.

There are several reasons for these deficits in labor availability, including the fact that the current labor force is retiring at a faster rate than it is being replaced. There are geographic factors impacting the workforce as well. More of the skilled trades are working in areas that have higher wages than those that don’t, further exacerbating the workforce deficiency in those lower-paying regions.

Construction Material Price Trends

Over the past year, material prices have increased steadily and continue to do so. These increases are due to the current global economy as well as politics. Currently, our domestic material prices are in alignment with global commodity trends. However, following the Section 232 and 301 tariffs recently approved by the Trump administration on nonferrous metals such as copper, steel and aluminum, we have seen price increases, ranging from 15% to 40%, virtually overnight. There will also be supply issues with these commodities while production facilities in the United States come back online and global demand redirects these resources from the U.S. to other parts of the world. It is anticipated that the post-tariff prices for these nonferrous materials will seek equilibrium by Q2 2019, with the initial risk factor and subsequent cost increases taken into consideration.

Nonferrous metals are not the only materials to be targeted by Trump administration tariffs. Costs for soft-wood lumber (framing timber, plywood and OSB products) are increasing as well. Given the recent resurgence of residential construction nationwide, supply and demand factors will also impact these soft-lumber costs. When all is said and done, this could mean a 20% increase from current prices.

Handling The Cost Escalation

Unfortunately, there is no silver bullet or simple way to avoid this labor and material cost crisis. That means it is more important than ever before to ensure that project cost estimates, budgets and other economic studies accurately reflect the latest market trends and conditions. This critical insight will help all parties involved make educated decisions on when to procure the affected materials and labor required to keep projects moving and within an acceptable level of profitability. If these steps are not followed, the repercussions could be disastrous, leading to potential cost overruns, delays in schedules, and/or the projects being stopped all together.

Simply put, the stakes are incredibly high right now in this rapidly changing market. A thorough understanding of these dynamics and cost-estimating expertise is imperative.

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