Costs
Shifting to the inevitable issue of the bottom line, Ernie Straub sounded out his colleagues as to what kind of labor and commodity costs they were facing this year and next.
The problem Dan Oxler cited was the erratic jump in commodity costs. “We will get a notice on Friday that the following Wednesday the price rate goes into effect,” said Oxler. Needless to say, this makes bidding difficult and lump-sum bids precarious.
When asked how he deals with lump sum bids, Oxler answered, “You try to buy as much of that project as soon as you can as quickly as you can” and then warehouse the material until needed.
Asphalt is one of those commodities in flux. Although asphalt has been coming down in price this past month, as Mark Sherwin commented, “You can still only get a bid for two weeks.” One response has been to work out an arrangement with site development contractors. “If the asphalt goes down in price, the owner gets the savings.” If it goes up, the owner pays fair market value.
“That’s worked very well,” agreed Randy Griffin, “especially in the industrial market.”
“Sounds like a fair approach that all contractors would embrace,” said Straub.
“The economists are predicting a relatively modest inflation for this coming year,” elaborated Rita Cortes, “but the lessons of the last three or four years in the industry are to hold your breath, because you don’t know which commodity it is that is going to go haywire during the year.”
Cortes recommended that her industry peers be as conservative as they have all been over the last few years. “It’s difficult to predict what the next natural disaster will be,” said Cortes, “or which segment of that commodities market is going to get dinged.”
Tony Privitera of Mark One Electric cited a corollary problem. The high price of copper has made construction sites prime targets for theft. “It changes the insurance and has a different effect on the builders,” said Privitera. “It isn’t just the cost of the copper anymore.”
The challenges of commodity pricing, Straub noted, make it all the more difficult for small, minority subcontractors to go out and buy the plumbing or the wiring for the whole job up front. “It’s a vicious circle,” said Straub, “that makes it more and more difficult for the smaller contractors to stay in business.”
Privitera noted that there are some general conditions that are going to raise the cost of a project, including off-site storage and security guards.
Grover Simpson observed that, on the insurance front, there is a significant amount of competition in the marketplace to serve existing construction clients as well as to obtain new construction clients. The result is “some pretty nice decreases in the unit costs with most of the insurance products that the contractors are preparing.”
“The residential piece has improved dramatically over the last 3 years,” affirmed Straub. “That’s been very positive coming from the insurance industry.”
Simpson saw that improvement as a result of the steps the owners have taken to better manage the risk of their projects. Correspondingly, the insurance industry has “learned to take more competitive positions in their projects.”
As to labor costs, Don Greenwell spoke of a 4 to 4 1/2 percent economic package increase, which includes health and welfare and pension funding as well as wages. “That’s pretty much national average,” he added, below the CPI on wages and above on benefits.
Litigation
Ernie Straub asked the somewhat ironic question. “What are the growth areas in litigation?”
Tom Whittaker of J.E. Dunn has observed a rise in construction defect litigation on either coast, primarily as a result of the big boom in residential, specifically condominium construction.
“The good news is we haven’t seen that yet in the Midwest,” said Whittaker. This heads-up gives local contractors the ability to start changing practices.
Straub asked whether local contractors were still seeing the EFIS (exterior finish and insulation system) exclusions on insurance policies.
“Quite frankly,” said Grover Simpson. “I don’t recall a claim related to EFIS in the last two or three years.” According to Simpson, the industry recognized the issues and is managing them.
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