News Brief from Mulford Cost Management, LLC

Recently we have been getting signs that construction price escalation may be starting in North Carolina. We have received reports that some suppliers and subs are very busy and not taking on more work, and that general contractors are not finding adequate bid coverage for certain trades on bid day.

Typically we look for the design community to get busy with new projects, then 6 to 9 months later the contractors get busy as they bid the work. However, it seems the contractors are ahead of the designers in terms of workload. The great recession has apparently put many of the weaker contractors out of business, leaving a small group of survivors. As more and more work becomes available capacity can be reached pretty quickly for certain trades. At that point contractors can be selective about the projects they bid and can start testing the market on how much it is willing to pay, leading to price escalation. There is also a lag period while new players get organized and enter the arena.

So what can we expect? An analysis of the last recessionary period showed North Carolina school construction costs were flat from 1995 to 2003. Then in 2004 the average cost for a NC school increased over 17%, and in 2005 another increase of over 28%!!!. Granted this was during the “housing bubble” years but it goes to show what can happen. One analogy is to image a balloon held under water for a period of time. Once the pressure to hold it down is released, it will pop to the surface. Price escalation can behave similarly, starting slowly then accelerating.

As cost estimators, we are very sensitive to news of increased costs and look to advise our clients at the earliest opportunity. Our advice to prospective building owners is to:

• Start projects sooner than later as prices will rise
• Look to lock in prices for as long as possible
• Incorporate a healthy escalation contingency in any cost plan
• Identify project alternates to help manage bid day disappointment