Working Around Today’s Climbing Construction Costs

07/29/2016

Industry Insights Deal Book

It’s the same all over the country: construction costs are through the roof. Since 2011, the national RSMeans Construction Cost Index has increased an average of 2.3% annually, totaling an 11.8% increase over that time. In some urban areas, costs have more than doubled in the last 5 years. In San Francisco, for example, the price of development has gone from $200K per door to $460K between 2011 and 2016. You can be sure that this is having a big impact on real estate developers.

What’s behind the rise?

There are several factors driving this steep rise in construction costs, but the primary cause is a shortage of qualified labor. This is rooted in the 2008 crisis, when many construction workers left the industry and never returned. The industry lost nearly a million workers between 2005 and 2015. With increased competition for their skills, construction workers can command higher wages. Recent legislation may lead to more increases in pay for construction workers after this year. Changes have been made to the rules for overtime pay, so that beginning in December 2016 anyone making under $913 per week in construction must receive overtime pay for any work beyond 40 hours per week. Aside from labor, developers are contending with other hard costs including materials, excavation, landscaping and the like. Prices for materials are holding below last year’s levels overall, but they’ve been inching upwards steadily over the last 3 months. Despite these challenges, demand is high for new commercial projects, so developers are looking for ways to move forward. The projects can’t be done without labor and materials, so where can changes be made to cut costs?

Trim costs on the front end

The key to cutting costs for development projects appears to be shortening the project’s timeline through better planning and increased efficiency. An important tool for this is Building Information Modeling (BMI), which enhances collaboration and organization for architects, construction managers, and engineering firms. Using BIM allows for coordination of the entire project, from design to completion. It supplies all parties with a digital model of the project that includes specific parameters and materials, so that costs can be more accurately estimated. With this sort of comprehensive planning, material needs are clarified and a more efficient timeline can be devised for ordering these and logically timing their installation. This eliminates costly delays and reduces the total time required to complete the job. Unplanned changes can be costly; these can be minimized when BIM is used. Closely examining the material budget line by line can also help to trim costs. Standardizing materials and elements like doors, trusses, windows, and cabinets can result in significant cost savings over the course of the project. Another cost cutting step involves reducing design elements like balconies, breezeways, and stairs. These don’t add to the building’s actual rentable space, and reducing their use in the design can save as much as 10% per square foot on construction costs, in some cases. Similarly, situating projects on smaller lots can be an effective way to trim overall costs. Even in times of unprecedented costs, commercial development is booming. With access to tools that make planning and execution more efficient, developers can compensate for rising costs for labor and materials without sacrificing quality.

Working Around Today’s Climbing Construction Costs

What’s behind the rise?

Trim costs on the front end

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