New Challenges Presented by Construction Cost Estimates

The last couple of years have been known as a time when the world economy went through a terrible time; the subsequent effects on the construction industry were not good. This resulted in this period being one of the most volatile on record when it comes to pricing of construction supplies, materials and services.

However, there is still some good news. Contractors in the construction industry will be glad to hear that the general demand for new commercial and residential buildings has been on the increase recently. This is especially the case in the United States. According to the U.S. Census Bureau of the Department of Commerce, as of August 2005 construction spending was estimated at a seasonally adjusted annual rate of $1,108.5 billion, 6.1 percent above August 2004. During the first eight months of 2005, construction spending amounted to $723.7 billion, 9.0 percent above the same period in 2004. From July to August 2005, the fastest growing segments of the construction industry were highways and nonresidential private construction. This means that it outpaced the rate of growth in residential and all other facets of public construction.

The demand towards new construction is steadily growing. One would thus think that this is good news for stable construction costs. Unfortunately, this is not the case at all. External forces have resulted in exceptional rate increases for a wide range of integral construction supplies, raw materials and services. This fact has made the process for long term cost projections more difficult now than it’s ever been.

At times when some of the most used raw materials such as petroleum, concrete and steel experience double-digit inflation rates, the amount of time for which material suppliers, subcontractors, general contractors and cost estimators can commit to pricing becomes shorter. Commercial construction companies that have an established name in the industry usually have good relationships with major subcontractors and suppliers, as well as the expertise to provide as much pricing information and commitment as possible. However, fact of the matter is that the global economy and the effects of natural disasters influenced all role players in the building process when it comes to projecting construction costs on the long term. Seeing as prices for the core raw materials are increasing at eight to ten times the economy’s inflation rate, it is thus no surprise that it is extremely difficult to commit to pricing several months in the future that is still cost-competitive.

Because the volatility of raw materials and supplies will continue for some time into the future, developers must find some other ways to compress the construction schedule and work with leading industry partners to increase the legitimacy of their project budget. Examples include:

Making contact with a general contractor or construction manager early in the process is a good way to control time in the initial planning phases. This is because these experts understand permitting and other legal requirements and can ensure all documentation is filed thoroughly and in a timely manner, reducing schedule delays early on.
Tilt-up construction and Fast Track are construction approaches that have definitely reduced the timetable for delivering a construction project.
Certain building owners are beginning to take a more active role in the building and design processes and are functioning as a team member to streamline communications and also strive towards completing projects faster

Both developers and business owners should carefully control these approaches and only work with general contractors who have a relationship with quality suppliers. This will maximize their ability to project and budget construction costs accurately right through to the end of the building’s construction process.