With the housing crash well behind us, and many real estate investors and government agencies are prepping for some major spending—it’s an exciting time for our industry. While an increase in real estate investments has many construction firms aggressively negotiating contracts and bids, there is a reality that we must face. Slowly but surely construction costs are beginning to rise, and some fear 2017 may be the tipping point.
Why Materials Costs Are Rising
On average, materials costs rise 0.5% each year. While this doesn’t sound like much, multiply 0.5% times any seven-figure project budget, and it really adds up. In Oct and Nov of 2016 prices actually dropped 0.5%, but as energy prices continue to rise—materials costs will have to rise to account for the difference. This creates a ripple effect:
- When materials cost more to transport, materials manufacturers must offset costs by increasing their wholesale pricing.
- Unplanned increases in wholesale prices negatively impact construction firm’s bottom line.
- Since construction firms bid on projects that are many years out, the rising costs will have to be built-in to future projects.
- As the cost of current and future projects rise, the cost to the developer rises.
- As the cost to the developer rises, the costs to the consumer rise.
- As the costs to the consumer rises, spending slows.
- As spending slows, real estate investments begin to slow.
Labor Budgets Have Increased Which Further Increases Construction Costs
Fluctuating materials costs are built-in to every project, which provides some breathing room which will help to absorb some of the above costs. What has not been built into the budget, or what many firms are adjusting their annual plan to reflect—is the rising cost of labor.
The ongoing nationwide talent shortage has construction firms investing handsomely in strategic recruiting and also in out-of-the-box methods of encouraging young talent to pursue a career in construction. While this investment is mandatory, it is creating a whole new line item of spending. More importantly, to attract and retain the skilled labor and top talent required to build your dream team—you are likely to offer more competitive salaries. So much so, that as of July 2015 construction salaries have grown 3%, averaging out at $28.20 per hour. This is exciting for laborers, but costly for construction firms.
Construction Costs Rise Faster Than Inflation
With just these two areas of spending increasing at such a rapid rate, the cost of construction continues to rise faster than the rate of inflation. What this means is that firms must find ways to reduce spending in other areas, without sacrificing safety or quality. The role technology will play in this is major, but will not completely offset the rising costs. Also, keep in mind that new technology requires ample upfront spending.
How Retention Can Help Minimize Rising Construction Costs
We are part of a notoriously loyal industry, which is struggling with retention more than ever before. With the current talent shortage, construction recruiters are targeting gainfully employed and content professionals—and providing them with enticing reasons to consider other opportunities. To minimize your recruiting budget, you must ensure that everyone you onboard is there to stay. You must also provide attractive reasons to stay, by rethinking your company culture, construction salaries, and employee benefits.
How TBG Can Help
TBG is a tenured construction recruiting firm dedicated to helping you build your dream team. If you are ready to take a proactive approach to recruiting and retention, reach out today to discuss a custom recruitment strategy.
