U.S. coronavirus cases are plunging and businesses are fully reopening. Meanwhile, the challenges of developing new office buildings and renovating existing ones are only compounding as project pipelines fill up amid unpredictable economic factors: skyrocketing materials prices, a tightening labor market, soaring demand and problematic supplies. Real estate developers, owners and their builders must take action to mitigate the financial impacts and keep projects on track.
It’s no secret that building component costs have risen at an unprecedented rate in the past year. According to the U.S. Bureau of Labor statistics, from April 2020 to April 2021, material prices increased an astounding 143 percent for refined petroleum products such as diesel fuel and asphalt base, 90 percent for lumber and wood products, 78 percent for cold-rolled steel sheets that are used for metal studs, and 31 percent for copper wire and cable.
Such extreme material price increases have intensified over the pandemic and spread to other components, all while severe shortages and supply chain bottlenecks have lengthened timelines for production and delivery. These challenges are not limited to one type of building construction—both ground-up and renovation projects across all property types are realizing the effects of higher prices and scarce supplies.
How can developers, owners and builders overcome these economic challenges and mitigate the risk to their project’s bottom line? Consider the following five solutions:
Blend the team early
Time is money, so in order to ramp up speed to revenue, break down barriers and combine teams sooner rather than later. Early collaboration between architect and contractor—in a design-build or design-assist delivery method—will accelerate schedules and prevent expensive, time-intensive redesign. For example, making smart design choices in terms of where the major vertical circulation (i.e., stairs and elevators) is placed in a ground-up project can preserve substantial budget dollars.
Stronger, earlier collaboration on these elements avoids do-overs later, but challenges are bound to happen. Develop backup scenario plans in advance – this strategy will allow the team to rapidly and seamlessly shift to an acceptable plan B or C and avoid delays or cost overruns.
Lean construction provides greater stability, reliability, efficiency and flexibility. A Lean builder can help navigate market conditions and material shortages and will maximize ROI by conducting ongoing research, monitoring economic trends and providing counsel on lifetime costs, environmental impact, inflation and more. Builders with Lean DNA are master planners and professionally trained in delivering optimally efficient projects, reducing waste during all stages of construction.
Dodge Data & Analytics research demonstrated that “high Lean-intensity projects” were three times more likely to complete ahead of schedule and two times more likely to complete under budget. Dodge found that of projects that did not implement Lean methods, 61 percent finished behind schedule and 49 percent completed over budget.
Expand the material mix
Evaluate and analyze substitute materials and systems to expand the menu of choices for all components of a building, including foundations, superstructures, framing, enclosures, systems, interior building materials and more. Working with the contractor and strategic trade partners early in the design phase can ensure that extending the list of acceptable substitutes does not compromise on safety, quality, durability or functionality. Every project has options.
Specifically, pre-cast concrete, ready-mix concrete and different wood species have become useful substitutes. On one recent project, the original plans called for Douglas Fir for the wood-framed structure, but the suppliers couldn’t guarantee delivery in time, so the team determined that Spruce Pine Fir would be a suitable alternate to maintain the construction schedule.
Procure materials earlier
Material prices are moving fast and furiously, causing daily uncertainty about how much a product could cost down the line. Working from real, data-driven expectations can aid in making material procurement decisions earlier. Buying materials earlier will typically result in cost savings and greater decision-making power about other factors later in the project. It mitigates unknown exposure to shortages and can ensure access to materials when needed.
Establish strategic budget reserves and a reinvestment plan
Try to carry extra contingency and avoid building to your max budget upfront. Build a strategic buffer, and, more importantly, a schedule of milestones for reassessing risk at the last responsible moment and gradually releasing reserved funds back into the project as risk diminishes. For instance, if your project budget is $15 million, target a spend of $14.5 million and then systematically release the balance if economic conditions improve. Converting surplus contingency adds real value and allows for adding project wish-list items such as upgraded finish materials, appliances, technology, landscaping and more.
The economy is uncertain, but the risks are tolerable and quantifiable. Lean, experienced builders know how to manage projects throughout increased volatility. A combination of these solutions—early team collaboration, Lean best practices, material flexibility and agility, and strategic budget reserves with reinvestment milestones – will help mitigate risky economic variables and ensure the reliable, on-time, on-budget delivery of your next construction project.
Justin Brown is president & CEO and Dan Ulbricht is vice president of Skender, a full-service building contractor headquartered in Chicago.