Written by: Ben Wilhelm, President, Carolinas Region
This time of year many of our clients put our construction budgets to the test as they try to put a shovel in the ground by spring or early summer based on a budget that was created some time ago (maybe a few months or, yes, even a few years ago). One challenging question we get is: What do you see happening with labor and pricing? I have invested time asking our subcontractor partners, vendors and economic thought leaders about this topic. In an annoying way, I have inconclusive answers. Allow me to outline some of the feedback to inform your perspectives.
According to NEWSOBSERVER.COM, North Carolina added 12,500 construction jobs this past year, a 7.2% increase. This outpaced the national average of 4.9%. My visual inspection of the Charlotte region leads me to believe we are going to see pressure to find and retain strong, skilled labor for the next year at a minimum. We are facing higher wages and more recruiting activity for field and management people – a signal that the industry is gaining confidence in its future prospects.
The December 2014 BLS (Bureau of Labor Statistics) Economic Release cites seasonally adjusted unemployment at 5.6%. Sounds pretty tight. However, when you incorporate those marginally attached to the labor force, often candidates for construction labor, unemployment is 11.2%. Therefore, it is likely that the market has some capacity to add construction jobs without driving up prices on the less skilled worker, but demand is high regardless. Depending on the type of commercial job you are building, escalating labor costs will put pressure on budgets and construction schedules.
Engineering News-Record published its cost indices for construction, building and materials cost in January. All three categories indicate a range of 3.2%-3.7% increase, which is not surprising. While steel, lumber and drywall prices have declined or remained flat, pipe and aggregate materials are on the increase. Commodities pricing is all over the place which cautions us to be attentive. I spoke with one of our industry partners who suggested he doesn’t see any anticipated increases in cost, while the other material supplier noted prices were going to grow by double-digits in the spring. So, you are saying we are confused? Actually, I think we are saying we don’t really know.
While fuel costs have plummeted across the nation, we have experienced significant increases in building construction. According to a recent forecast published by the American Institute of Architects, non-residential building is projected to grow 8.0% in 2015. If growth is anywhere near this pace, diminishing energy costs will not counter balance the influence demand will have for construction costs.
I sought the perspective of Dr. Matthew Will, financial economist and professor at the University of Indianapolis, who corroborated the idea that the future of prices and labor are inconclusive. However, he also cited the recent International Monetary Fund’ caution for deflation. The United States is the lone bright spot in an anemic world economy. Lower oil prices and the depreciation of the world’s leading currencies, could signal deflation for the dollar. As Dr. Will noted, “If you take a dollar, bury it, and if it is worth more next year, we are in trouble.” Our economy is dependent on expansion but our economy is also reliant on global growth to fuel our own. Let’s not worry ourselves with that until 2016!
Though we do not have clear optics on price and labor costs, our experience suggests that the subcontractor and supplier community is more active, and the quality and quantity of opportunities are improving. The construction provider has a rare luxury to be more selective in pursuing higher probability pursuits with better prospects for profitability. The more you can clarify the design and procurement objectives, the better the market will respond with competitive proposals. If the buying practice is well executed, you can still stretch your construction dollar in the short-term.