BBS Risk Management – Construction Costs.
What a tumultuous year we have had here in the Northeast Region. As we enter the second year since the pandemic hit, we are seeing signs of relief and recovery paired with a rise in consumer sentiment. Businesses are re-opening and rebalancing their approaches, complete with new jobs that have lowered unemployment claims. However, challenges we are all facing continue to develop and evolve. Thankfully, we are mindful, aware, and more capable of adaption than ever before, but our next challenge has just recently presented itself.
Although the perceived future is growing brighter every day, we are feeling financial pressures in the municipal design and construction market. Due to a variety of reasons such as COVID staff shortages, import bottlenecks, truck and rail capacity, and even the winter storm in Texas, the supply and availability of construction materials has been deeply affected. Lead times are currently getting longer while costs are rising significantly. Suppliers are often unable to hold pricing quoted just a few weeks prior.
BBS is at the forefront of evaluating and understanding changing market variables within the construction industry. We work closely with construction management firms, contractors, vendors, suppliers, and clients to assess and provide risk management plans moving forward. Flexibility is key in creating ways to accomplish work scope through budgets, base-bids and alternates during these challenging times.
Copper prices are at their highest in over a decade. As oil prices rise, so do energy costs. Refining copper is an energy-intensive process that accounts for thirty percent (30%) of its total cost. Since February, steel costs have increased by an additional thirty-five percent (35%). This affects not only structural steel, but also rebar, metal studs, lockers, and all other steel-containing construction materials. Roofing, insulation, and adhesive raw material shortages are due to service disruptions from chemical suppliers. Even while wood production is at a 13-year high, lumber prices are up nearly 200% over this time last year, mainly driven by the COVID residential building boom. Supply is simply unable to keep up with this unprecedented moment in history. Perhaps as we continue to open-up from quarantine some of these situations will self-abate, but for now they are real issues to be dealt with.
Recently within the greater NYC Metropolitan Area we have seen an array of new contractors enter the municipal market due the stoppage of non-essential NYC School Construction Administration projects. Starting in the summer of 2020 and continuing until recently such increased competition helped lower construction bids. However, and unfortunately, many new arrivals are not fully aware of the more stringent requirements and expectations of these municipal contracts and as a result many of their bids are errant and therefore have to be discarded; what seemed a positive effect of competition has turned out to be no more than an abundance of unknowledgeable participants. The situation is similar in other metropolitan and surrounding rural areas of New York State and the Northeast in general.
It appears to be the ‘perfect storm’; higher costs for not only raw materials but for all the derivative manufactured products purchased as equipment, furnishings and building system components. This will impact public bidding moving forward, so we need to plan our budgets accordingly and adapt our work scope bid packages to be able to navigate these troubled waters. The third aspect of risk management is the need for a contingency plan that should also be developed in tandem with budgets and bid packages.
BBS remains vigilantly aware of our rapidly changing industry and will work with each client to potentially modify their capital construction programs according to circumstances. As a leader in the municipal A/E industry, we pledge to continue our stewardship of your capital projects through this uncertain time.