A CONVERSATION ABOUT CONSTRUCTION COSTS
Construction costs are going down due to the slower economy: True or False? Our clients are asking us this question. So we asked an expert, Jamey Flannery, Owner of Flannery Construction, to help us with an answer. Flannery Construction is a mid-sized, woman-owned construction company that works all over the metro area. They do ground-up construction of multi-family, industrial, and office. They also do tenant build-outs. Look for their signature building on I-94 just east of Allianz Field.
Q: Are construction costs going down?
A: I will say that as much as we would like it to be true, there is a lot of upward pressure on construction costs. We are seeing huge increases on lumber. That seems to have leveled off recently and even declined a little bit. However, we were up almost 100% from pre-COVID levels. We are seeing cost increases in PVC and a few other materials. That has putting a lot of pressure on contractors. While we are slower than we anticipated this year, we’re still fighting against really long lead times for materials. We’re also fighting against cost increases for materials. So the answer is “NO” construction costs have not declined.
Q: Is now the time for businesses to do that $1 million construction project they have been considering?
A: I think they should do the $1,000,000 construction project that they are planning to do. I think the only reason that the prices aren’t higher, is because contractors are absorbing cost increases.
Q: Is this in the form of reductions in fees and/or general conditions or just lower profits overall?
A: We are see lower profit margins overall.
Q: How are you doing with your supply of labor and is COVID affecting availability of labor?
A: COVID is keeping labor prices stable and we are seeing a lot of inquiries for jobs in the trades. We’re seeing a lot of hungry subcontractors right now and good pricing. They are essentially absorbing some of these cost increases. However, we’re also seeing a few subs that have a crew or two who are down with COVID, so planned work isn’t exactly staying on schedule.
Q: Are wages for labor increasing too or is that staying pretty much stable?
A: We are a union shop so we will have a labor increase in May, but I think that, generally speaking, wages are going down and it’s favoring the employer right now.
Q: If you had to give some advice to people who are looking at a construction project, what delivery method would you say is the best way for them to go about it?
A: It is entirely up to the owner, but what I think is the best delivery method is negotiated or design build. The reason for that is, if every team member really has a firm understanding of the intent behind the project, we’re going to make better decisions. If the contractor really understands the project well up front, they’re going to help the owner make very informed decisions. With the delays and with the cost increases, we are having to build our contracts a little bit differently. We might have to submit a letter of intent to some of our subcontractors before we sign a contract because of the long lead times.
Q: Do you have any recent examples of the long lead times?
A: We had a conversation with a subcontractor supplier today where we need Hardie plank siding panel delivered on January 7th. If we had placed that order one day later, we would be looking at a 30% cost increase to receive an order on a specific date. That is true through April because they are so backlogged. So, working with your contractor to understand what’s happening in the marketplace and what conversations need to happen before the contract is signed is important. That really does emphasize the need to have a general contractor partner with a negotiated project.
Q: Some of our clients get concerned that without a full-on multiple bid process, they won’t get the lowest price. What do you think about that?
A: There has been a fair amount of research on delivery methods and while the hard bid may have an initial lower cost, the total cost can creep up pretty quickly because of change orders. Having that group and team understanding of the project, leaves less room for change orders when we are delivering a turnkey project. In a hard bid scenario, if there is a mistake on the plans or an omission or an assumption, then we’re going to assume the lower number because we want the project. I’ve seen it many times where the hard bid is low and then the change orders start because there wasn’t complete understanding of the total project.
Q: What is hot right now in the marketplace in terms of construction projects?
A: Multifamily is still running hot. There’s still a hot market in Saint Paul, Minneapolis and in the surrounding suburbs. We’re not seeing very much in retail. We’re not seeing very much in hospitality right now, which understandably so. Industrial is a hot market as well.
Q: How are you seeing the approval processes in cities now that many of the city’s employees are working from home?
A: It is excruciating. It is taking longer now. This is an anecdote in the City of Minneapolis. While they are being as responsive as they can be while working from home, the process to upload plans is one page at a time. Everything is just taking longer because there’s not a lot of collaboration so the person who’s reviewing can say to the person next to them “hey, what do you do in this situation”? So there is less collaboration, and everyone is just a little burnt out.
Q: What’s your prediction for the future?
A: I am an optimist. I think that we were due for a market correction anyway. Unfortunately, it really is hitting a lot of people hard, and I’m not minimizing that on any level. I do think that this correction is taking place of a market downturn that had been anticipated for 2021. When there’s a widely available vaccine and it’s in place for at least a little bit, I think that we’re going to come back pretty strong. I look at Architectural Billings as my leading indicator. Contractors follow about six months to a year behind architects. They have been down since March, April, and May. The only positive indicator that they have is that new inquiries are up significantly as of September and October. Money is cheap right now and I think that we are going to come back strong. So, we’ll have a strong second half of 2021 going into 2022. I am looking at shoring up my project management staff so that we can be ready to take on the increased workload that I am anticipating.
Q: Thank you Jamie and where can our clients get in touch with you?
A: Thank you, John they can find us at Flanneryconstruction.com or stop in our building on I-94 by Allianz Field.
1375 St Anthony Ave | Saint Paul, MN 55104
Written By: John Young, CCIM | Vice President