The Perfect Storm for Rising Construction Costs

commercial construction costs
If you’re a builder, you’ve probably noticed that construction costs have skyrocketed in 2020. In this post, we look at 4 incidents in 2020 that led to what we call a “perfect storm” for increasing construction costs and what you can do to increase your profits in the wake of this storm.

How COVID, Civil Unrest, Fires, and Hurricanes Caused Residential and Commercial Construction Costs to Soar in 2020

This year has seen the perfect storm of crises, leading to significant increases in construction costs. Families required to remain in their homes through government orders have discovered that their existing house can’t keep up with the demands of daily life when everyone’s home all the time. Moreover, business owners who have seen their businesses burn in riots are rebuilding. As wildfires are extinguished, homeowners are working with insurance companies to get their lives back to normal, but lumber costs are still on the rise. On the coast, home and business owners are rebuilding after hurricanes yet again, with an eye to resisting the damage of future storms. All of these crises have contributed in one way or another to the increases in residential and commercial construction costs in 2020. Let’s look at this storm surge, to see how builders can best weather through it by reducing costs for leaner operations.

Threats Causing Rising Construction Costs in 2020

The events of 2020 have already taken a significant toll on our personal and professional lives, and the construction industry has not gone without impact. COVID-19 swept through our world just as we were preparing for another year of phenomenal construction growth. Riots, wildfires, and hurricanes caused severe damage to homes, businesses, and the landscape. With all of these looming threats to infrastructure, here’s why the costs of construction are rising in response.

COVID-19

COVID-19 has caused a serious change in how we live, learn, work, communicate, and consume. Within a few short months, millions of children were staying home all day with parents now working from home as everyone adapted to “the new normal”. Many homeowners discovered that their home didn’t meet their needs. From the spare bedroom turned home office, to the dining room table “desk”, many homeowners undertook a wide range of DIY projects or hired professional contractors to make long-term renovations. Home remodeling jobs accounted for a 58% job-lead increase. The most popular type of project being outdoor projects, which were met by material shortages, and increased material costs because of the virus. However, after March, home buying rapidly increased also contributing to an increase in residential construction costs. According to NAHB, “the composite price of lumber has increased by more than 170% since mid-April,” which has caused the average price of a new single-family home to increase by $16,000. The Turner Construction Cost Index, also shows that although prices began to dip by the third quarter 2020, commercial construction costs continued to rise.

Riots

2020 was an election year, which gave way to civil unrest. Throughout the summer, racial injustice by law enforcement in our country spurred thousands of peaceful protests and others that turned violent across the country, leading to at least $2 billion in insurance claims for damage that must be repaired or replaced. Protesting and civil disorder continued post-election, causing more chaos and destruction. When a business is destroyed, the business owner may choose to have their building rebuilt in the original location or a different one once they’ve settled with an insurance company. As these businesses are rebuilt, construction costs will continue to climb through material demand and the longer time-frame associated with construction projects in COVID-19.

Wildfires

The 2020 wildfire season in the United States was record-setting. As of November 27, there were over 52,000 wildfires that burned over eight million acres this year, with the bulk of these fires occurring in far western states, including California, Oregon, Washington, Idaho, Utah, Arizona, and Colorado. These fires have destroyed thousands of homes, with the Alameda fire being responsible for the loss of 2,357 homes and causing damage to 57 additional homes. Because of the sheer volume of homes that have been damaged or destroyed by fire this year, many construction companies will find themselves very busy building new homes or repairing damaged ones. Homeowners may have difficulty finding contractors due to high-demand. Recent wildfires are also increasing the costs of construction by destroying lumber resources

Hurricanes

Adding to this perfect storm, the 2020 hurricane season has been more dramatic than most. Climate change, extra-warm ocean temperatures, and La Niña have led to an exceptionally active hurricane season. It’s been so crazy that for the second time since the National Hurricane Center’s inception, all 21 selected names have been used and the organization has had to move onto Greek letters. Nearly 90% of American shorelines have been under a tropical storm or hurricane advisory this year. It’s still estimated that the storms this season have caused a bit over $22 billion in damage throughout the world. As those homes and businesses are rebuilt, materials and construction firms will be in high demand during a hurricane season that still has time to run before its November 30 end date. Because of the high demand for labor and materials, construction costs rose 5-10% following the impacts of Hurricane Harvey.

Ways to Fight Rising Construction Costs in the Upcoming Year

There’s no doubt that the craziness of 2020 will be a topic of conversation for many years to come. However, by being smart about the construction business decisions you make, you can keep your company operating effectively while the market is undergoing these compounding shifts. 

Smart Purchasing

When you’re able to, try to take advantage of auctions, closeouts, and similar purchasing options that allow you to enjoy significant savings over everyday purchases. Though this will almost certainly not cover all of your material needs, it will help soften the blow.

Lean Profits

When construction costs are rising, you have the option of putting your company on a strict diet, lowering the profit percentage you add to projects. However, it’s important that you account for possible losses on the jobsite.

Material Delivery

It doesn’t make sense to pay union wages for your workers to pick up and deliver materials. In a tight economy or high construction costs, hire out your material delivery for a lower overall cost.

Reduced Overhead

Overhead expenses are required to keep your business operating, but that doesn’t mean expenses can’t be reduced. Beyond getting new insurance quotes on your vehicles, installing more efficient lighting, and automating workflows to reduce office staff expenses, builders should try to eliminate one of their more costly overhead expenses: cost estimators. In-house estimators are large expenses that can be outsourced to cost estimating services. The best cost estimating services develop relationships with local suppliers, enabling contractors to get the lowest prices while reducing overhead and the huge headache that accompanies it. 

By understanding the factors that are impacting construction costs and how to get around some of the rising construction costs, you can keep your firm working well and making a profit long after the events of 2020 have passed.

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