The Downside to an Economic Recovery

Unemployment is down. Construction starts are up. While this is generally good news, we have to be wary of inflation in construction costs. The downside of prices dropping 20% a few years ago is that they will have to rise 25% to get back to where they were. 

Union labor costs have not gone down on an hourly basis, and while there was some softening in material prices, it was mostly offset by the continued rise of fuel prices. Essentially, all of the price drops came from 1) increased productivity from the remaining employed craftspeople, who were the best of the best, and 2) tighter margins for contractors.

This is the shortcoming of most of the published cost indices - they only address material, hourly labor costs, and equipment costs, so they don’t accurately reflect the wild swings caused by 1 and 2.

Blach spends quite a bit of effort reaching out to our partners, especially subcontractors and design firms, to see what they are experiencing in the local markets. In addition, we are very active in trade organizations such as AGC, LCI, and ASPE, to keep up with the state of the industry. 

The good, nay GREAT, news is that the Bay Area is the brightest spot in the construction universe. With several billion dollar projects underway, most visibly the 49ers stadium and the Apple headquarters, local capacity is being absorbed.

What keeps me up at night, the Kobayashi Maru as it were, is clients who set their budgets in 2009, at the nadir of the recession, and have finally got the funds in place for their projects. (For you non-Trekkies, the Maru was a test for Star Fleet cadets that had no solution.)

So, our advice. If you have a project ready to go, get going NOW. If the design is not complete, team with your favorite builder to start letting early packages, using design/build or design/assist if possible. Be very concerned about the financial stability of your contractor and subcontractors – recoveries are when contractors go under. Use bonds or Subguard. Material prices and manufacturing capacity are not a problem since the rest of the world is still floundering, but that won't last forever. 

Posted on April 04, 2013 by David Kramer
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