By: Dan Cicala
It is Thanksgiving ..
.. and despite everything swirling around us, from international concerns of war, climate, economics etc. to any of the more local, tangible issues impacting our lives, we have so much to be truly and deeply thankful for.
Veterans Day was just a few weeks ago. On so many levels, all of us are direct beneficiaries of the sacrifices made by others in years past. Because most of us have never had to deal directly with warfare or terrorism (even ‘September 11’ was over 20 years ago!), we have all become somewhat numb to the reality that we are blessed to live as freely as we do in the United States .. and we owe enormous thanks to those who have served and sacrificed for this country for this freedom … So, on this Thanksgiving, special prayers and ‘thanks’ to the veterans among us .. for them and their families ..
On to Construction ..
A little over a month ago at a regional Intermediate Unit Conference, I was asked to give an update on the status of the construction marketplace, an update more tailored to PA K-12 school construction but certainly relatable to the construction marketplace in general. While I cannot share the biscotti we ate at the Conference through this newsletter, I thought I’d share the essence of the information discussed.
The overall message, as we continue to chart a course out of the pandemic, is one of ‘Learned Stabilization’ in a shifting landscape, but, at the same time, of long-term “Uncertainty’ .. as record inflation has been encountered, resources remain strained, government spending is seemingly limitless, a war in Eastern Europe simmers and a ‘deficiency of harmony’ seems to be pervading almost everything.
Fidevia has been at work for nearly 20 years .. June of 2023 will be the official mark .. and while we are currently serving in five states, this market assessment, followed by constructive strategies, are specifically targeted to the Eastern two-thirds of the Commonwealth because we are much more intimately connected with the architects, contractors, subcontractors and suppliers who navigate this corner of the marketplace each and every day.
SUPPLY CHAIN UPDATE (MATERIALS) – MOVING TARGET:
Material Availability – Everything has been affected. Roofing, anything plastic, anything needing a chip, many things metal, HVAC equipment, mostly larger electrical equipment (such as switchgear, generators and panel boards), doors, windows, frames, hardware, specialty items .. again, everything .. and every week there are new issues to handle.
On top of this, due to inflation, subcontractors and suppliers are reluctant to commit to dates (that they often have no control over) and, even when a date is committed to, the date changes, sometimes multiple times, as the project progresses.
The good news is that professionals are used to it now. Operating from the vantage point of ‘there is always a solution’ provides a productive guiding framework to forge through whatever issue rears its head and there is always an acceptable solution ..
Overall Assessment – The supply chain is a ‘slow heal to a big, shifting wound.’
LABOR MARKET UPDATE:
Shortage of skilled labor is the #1 problem contractors face. There was already a pre-pandemic shortage of labor due to older, skilled craftspeople aging out of the workforce and an insufficient number of younger ones replacing them to meet market demand .. and this problem permeates across industries.
In September a Politico article pointed out that 4.5 million workers quit in March and layoffs were at the lowest levels since the government began keeping records, concluding that ‘employees arguably held more leverage over their bosses than at any time since the heyday of organized labor.’ However, while unemployment remains relatively low, the Government’s efforts to rein in inflation seems to be changing the paradigm, with one major company after another announcing layoffs or hiring freezes.
Shortage of Labor exacerbates supply chain stresses as labor is needed to mine, manufacture and assemble the materials needed for construction. As a result, the shortage of skilled labor has driven up contractor and supplier costs.
Overall Assessment – Construction Labor is returning to pre-pandemic conditions.
BID DAY COSTS HAVE RISEN DRAMATICALLY IN THE FIRST HALF OF 2022
No surprise to anyone, the United States has been dealing with historic levels of inflation. Costs for almost everything have increased dramatically. The following represents some of the factors that are particularly impacting bid day prices:
Inflation has caused subcontractors and suppliers to add more contingency to their bids, which results in prime contractors adding more contingency .. and more contingency on top of contingency for unexpected post award increases. It is fairly common for Owner / Contractor Agreements to stipulate that bid prices must be held for 60 days. How does that correlate to the fact that some subcontractors and suppliers may not be holding prices at all or simply qualifying them with disclaimer language that their price is subject to this or that variable, such as upon delivery? Interesting times, indeed!
Increased labor costs as noted above.
Increased costs to borrow due to higher interest rates .. Owners are not the only ones who need to borrow in order to construct; it is not uncommon for contractors to maintain interest rate-impacted lines of credit in order to manage cash flow.
Issues with escalation and difficulty in holding all prices is making longer-term projects more untenable.
The need to create phasing and overall schedules that are logical and efficient for contractors to build and rely upon has become even more important; poorly or unrealistically scheduled projects have a greater chance of being ignored by contractors, which in turn leads to fewer bids and higher bid day results.
The selected design team and Owner’s Representative will have a financial impact on the cost of the project in terms of design, attractiveness to bidders and overall management of process.
Trust .. Particularly in times of duress, contractors and suppliers lean on those they trust .. that translates to the number and quality of bids received as well as the prices quoted.
Overall Assessment – Based on the bidding we have seen, it appears that bid day costs spiked month after month for the first half of the year, but, for a variety of reasons, seem to be leveling off since then. Inflation, labor and material markets costs and constraints, as well as recession fears, continue to impact monetary policy and contractor/supplier behavior that overall seem to be tempering the rise of bid day costs.
ADVICE FOR PLANNING AND COMPLETING A CONSTRUCTION PROJECT TODAY
A construction project can be just as easily planned and executed in today’s economic climate as in one prior to the pandemic. While a threat of further interest rate increases and/or inflation might dissuade some from planning a project right now, there is no guarantee, or perhaps even an expectation, that costs will subside. Indeed, most people would not have predicted that overall construction costs would have spiked as they have in the past year; further, Owners who were anxious over awarding projects a year or year and a half ago are breathing a sigh of relief that they did not postpone in the hopes of de-escalating prices.
Nevertheless, Covid and its aftermath have significantly impacted the industry and an Owner would be prudent to take into account a number of considerations:
Increase Budgets and Increase Construction Contingency – Costs have gone up significantly over the past year. Successful planning requires an understanding of the particular market, and budgets and contingencies need to be adjusted to incorporate same.
Project Schedules
Contract schedules need to be reasonable and incorporate equally reasonable milestones; this alone can be the difference between a contractor bidding or choosing to pass and bid on some other project.
Consider issuing an early Notice to Proceed that provides additional time to start the procurement process.
Professionally created schedule buffers and ‘float’ clauses can be beneficial.
Liquidated damages, No Damage for Delay Clauses and Dispute Resolution Clauses should be revisited and modified to provide meaningful value and effectiveness. Further, completion dates as they relate to public funding (ESSER, for example) and contractual language that ties contractor performance to compensation must be carefully evaluated.
Purchasing
Choosing the proper project delivery method may not just be a matter of convenience but serve as the difference between a successful project or having a project at all!
Nothing beats a professionally designed, bid and built project (DBB), but other forms of delivery, including hybrids, should be considered where there are time and/or material availability issues.
Consider pre-purchasing equipment and specialty products.
Allow extra time for purchasing and give more attention to the process and the possibility of alternative products. Expect unexpected requests for material escalation post-project award.
Governmental Approvals
Many governmental agencies are not yet operating at pre-pandemic levels of efficiency. Therefore, more attention and time should be allocated to the securing of necessary approvals.
Additional Strategies to Keep Costs Down in a Volatile Market
Deduct/Add Alternates serve a purpose to protect the viability of a project and absorb unanticipated bid-day values.
Planned & Continuous Value Engineering throughout the process as much as possible.
Stored Materials – think through the need to early purchase, store (perhaps with actual planned storage at or near the project) and pay (with appropriate financial protections) for project materials and equipment.
Contract Cost Adjustments (Not Escalators) – We are not big fans of pegging bid day costs to indexes that can fluctuate post-bid. There is something ‘magical’ about a contractor preparing a bid and settling on a competitive price on bid day. However, recent inflation has opened our minds to a discussion and when the market speaks we need to listen and professionally respond.
Over Emphasis on Below Grade Conditions and Elimination of other Unforeseen Conditions – This is where project budget and relational distress occurs so take the time to do the homework up front. Looking back, one casualty during COVID, in our opinion, is that the design coordination process suffered due to the sudden elimination of in-person design coordination meetings.
Extra Communication – There is no doubt that delivering the same construction results in today’s marketplace requires more communication and coordination. But that is what is needed!
RESULTS
We have found significant success planning and awarding construction projects during and after the pandemic. For example, a month or so ago we were an integral part of a team process that culminated in the award of a $62,000,000 new construction project that came in several hundred thousand dollars under a budget established in January of this year. Likewise, just a few days ago we received bids on a $3,000,000 renovation that was budgeted and planned for the very same value seven months ago. The bottom line: if you have high expectations and appropriately plan, you will succeed!
That said, to ignore and underestimate the challenges posed by today’s economy will produce exacerbated disappointment and certain stress. While we are professional Owner’s Representatives and construction is what we do for a living, we too have likewise learned (and adapted) over the past 2 (nearing 3 already!!) years. We have modified some of our practices as to what ‘must’ be done in order to have a successful design, bid and award process.
In closing, if you are planning a project, are having difficulty with one underway or simply want to chat about some construction issue, we would be happy to discuss, share and help .. in the meantime .. wherever and with whomever you are ‘landing’ this Thanksgiving weekend, may it be Blessed and Safe .. Happy Thanksgiving!