For those planning a capital project when the pandemic hit, you’ve been struggling with it’s relevance and your ability to support any kind of construction project. A hundred what-if scenairos. But what about construction costs? What’s going on there. I had a simple idea. I’ve done it many times in the past as a way to advise my clients. If I called around to a group of my colleagues and asked what impact they are seeing on construction costs resulting from the CORONA-19 pandemic, I would be able to form a reasonable answer.
After listening to them and reading a lot, I found that the answer is … nobody really knows. My colleagues have thoughtful opinions based on projects in front of them and there are others bloviating all over the internet about this and that trend, but nobody knows much beyond their limited sphere. It was just like this in 2008 just as the great recession was unfolding. Panic or optimism arising out of fear.
In the historical account one guess out of many will turn out to be right and that pundit will win accolades for great vision.
Here are some of the factors, but no conclusions:
- How much work will pause and how much will disappear and will public work suffer too. In a competetive world, when there is a lot of work, prices go up. when there is less, prices go down, and they can go down quickly when contractors fear substantial reduction of projects. see my post Tick Tick Tick – Escalation.
- How will costs change? Wages are sticky, union wages more than non-union wages. They may not change quickly. The trajectory of various building material costs is unclear in a world challenged both by the pandemic and unpredictable trade policy
- Big projects, small projects, urban or suburban locations, different parts of the country, union vs non-union, public vs private projects. Every market segment will react differently to events.
- It’s premature to predict the cost of working on site in the pandemic world or how long it will last, though these costs are real and may be substantial, at least in the short run. Some subcontrators are holding the line on change orders, at least for now. In the private sector subcontrators depend on their relationship with general contractors and with the likelihood of less work in the future, nobody wants to be a jerk. On the other hand I have heard of initial claims of up to 15% in some public work where that realtionship is less important.
And it’s not just the narrow arena of construction. The multiple crises that we all face will evolve in unknowable ways. Life in the pandemic, the coming recession (don’t doubt that), the rising understanding of the systematic racism at the core of our society, and an unstable president and enabling Republican party.
So how is not knowing helpful? What is the best way to guide your project?
My thoughts:
- Pay attention and stay informed. Be ready to act or stop.
- Listen to your advisors and make them explain their thoughts. Get multiple opinions
- Hope for the best, prepare for the worst.
- Don’t rush. Things are only just unfolding.
- Focus on your mission. Can it evolve and evolve again?
Canaries and Frogs
For an indication of future construction costs, the canary in the mine may be what is happening to the pipeline of architectural commissions. Anecdotally, projects are getting deferred or delayed. Newly conceived projects have declined. There have started to be layoffs in the design profession. See this Architectural Record article. All of this translates to less construction in the next couple of years. Does that translate to lower costs? It usually does.
Some people seem to be minimizing the impact of the pandemic. There will surely be a dip, they say, but no reason it won’t come back relatively quickly, people will simply go back to work, the V-shaped recession. One friend compared this feeling to being a frog in a pot under a low flame. That frog never feels what is going on until it is too late.
Here is my one actionable idea. If you are considering a project or are in the early stages, what can you do now so that when the time comes you can proceed quickly? Pursue entitlements, an often time consuming process. You might bring the project to the end of design development. You will have spent relatively little and the scope and budget of your project will be defined, then pause if you must. Even if you have to make changes, they are still relatively inexpensive to make. Make sure you have provisional scope, both additive and deductive. You would be a relatively few months from bidding, a good place to await the unfolding of your financial capacity and market conditions.
That’s it. Good luck.