by Michael J. Dwyer, Principal, M&H Cost & Review Group
Tough times for the construction industry continue to support last year’s forecasts of an overall 7 percent decline in non-residential construction spending for the United States. Despite forecasts for a subdued economic recovery and a relative scarcity of nonresidential building construction, construction costs, year over year, have generally risen by roughly 2-3 percent. This increase reflects the actual cost of materials and labor. However, with limited construction activity, contractors are submitting bids at reduced rates to get work. For a developer, this can be a good thing and some developers will seize this opportunity to maximize the scope of their project. As a lender or equity investor, this can be a dual-edged sword!
The risks associated with investing and/or lending for any given construction project are aplenty. From a pure construction perspective, the risk that a contractor cannot complete the work for the contracted price can significantly impact the budget and schedule. While the lower than anticipated construction costs are welcomed at the project outset, if the contractor had priced the job at a loss, the potential for non-performance exists.
Low-rise office construction of projects that were bid, built, and completed during the past year resulted in the following mean costs:
When comparing project budgets to conventional historical data, there are many aspects of the actual project that require evaluation. Location factors, which are percentage adjustments for particular localities, are applied to mean cost estimates. Construction inflation factors, which are cost adjustments to historical data to reflect the latest labor rates and material cost adjustments for a particular locale, must also be applied.