Construction Cost and Market Factors
Michael D Dell'Isola PE, CVS, FRICS
Michael D Dell'Isola PE, CVS, FRICS
Senior Vice President
Senior Vice President
Faithful+Gould
Faithful+Gould
Speaker Biography
• Michael D. Dell’Isola, PE, CVS, FRICS
Senior Vice President
Faithful + Gould
Orlando, Fl 32810
• Degree:
– BSME
• University:
– Tufts University, Medford, Mass.
• Years of Experience:
– 40+
• Professional Field:
– Cost management, value engineering, life cycle costing, technology and
industry best practices
– Practitioner, author, educator and speaker
• Something you do not know about me:
– An avid golfer and car nut.
Construction Cost and Market Factors
2
Background
The construction
marketplace in the
USA experienced
dramatic changes
from 2002 through
2011.
• From 2002 to a peak in 2006, overall
construction spending increased by 35%
or an average of almost 7% per year.
The period recorded
the most significant
upward and then
downward change
in the last 40 years.
• As a result of the dramatic drop in
construction volume, exceptional
competition has dropped bid prices 10%,
20% to even 40%.
• Construction volume remains constrained
and bid prices remain very low
• After the peak year of 2006, spending
then decreased by almost 35% through
the end of 2011.
Construction Cost and Market Factors
3
Today’s Presentation
Introduction
Economics, Competition and Price
Construction spending and the cost of projects
•
•
•
•
•
How does competition affect indirect costs?
Tracking Competition and Bidding
What drives construction volume?
Regional Variations
Long term issues to consider
Projections
• Bidding Factors and budgeting projects
• Managing competition and dealing with low bids
Conclusions
Construction Cost and Market Factors
4
Economics, competition and price
5
Economics and Price
Basic law of supply
and demand
The “Old Days”
2006 marketplace
(The Boom)
Today’s
marketplace
(Post Bust)
• Construction is a commodity
• Unique projects
• Tough to “build inventory”
•
•
•
•
Four to eight primes
Three to five subs
Reasonable competition
Mostly design-bid-build
• Limited bidders – primes, subs, suppliers, etc.
• Numerous delivery methods
• More negotiation
• Abundant bidders – primes, subs, suppliers,
etc.
• Numerous delivery methods continue
• More focus on price
• Tough negotiating
Construction Cost and Market Factors
6
Construction Bidding and Estimating
Bidding goal
• Maximum price that can win
• Cash flow is a key
Bidders
• Prime contractor(s)
• Subcontractors
• Lower tier subcontractors and suppliers
Estimating and bidding
• Estimating is a technical, empirical and
predictive process
• Bidding is a business decision
Important assumptions
• Bids are only as valid as the scope and
documents on which based
• Bids are only as valid as the bidders who
prepare them
Construction Cost and Market Factors
7
Construction Spending and the Cost of
Projects
8
Construction Spending
January 1977 to 2013 - Projected (Average annual, Millions)
1400000
TerroristHousing
Attack Downturn
1200000
Recession
Recession
1000000
800000
600000
400000
200000
Year
TOTAL CONSTRUCTION
RESIDENTIAL
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0
NON-RESIDENTIAL
Construction Cost and Market Factors
9
Breakdown of Construction Costs
Total Costs
Prime
Contractor/CM
Mark-up
General
Conditions
Subcontractor
Mark-up
General
Conditions
Direct Costs
Materials
Purchase Cost
Installation
Labor
Taxes
Shipping &
Handling
Premiums
Fringes
Taxes/Insurance
Equipment
Operations Cost
Equipment
Rental
Base Wages
Construction Cost and Market Factors
10
Factors Affecting Bidding
Risk Premium
Purchasing aggressiveness
Indirect Overhead Costs
Technological/Informational
Advantage
Opportunity Cost
Profit Margin
• Compensate for risks that cannot otherwise be controlled.
• Mitigated by analysis, qualifiers, provisions and skills
• Depth of general conditions staffing.
• Risk transfer to lower tier subcontractors
• Purchasing of subcontractors and suppliers.
• Allocation of project overhead costs
• Position and command of marketplace
• Internal staff, marketing and business development,
insurances and bonding capacity.
• Track record is important
• Superior construction methodology and more effective
management strategies.
• Competition can create incentives for creative solutions.
• The search for change orders…..
• Implications of winning a bid or not winning
• Backlog as critical for long term success.
• Future work potential and cash flow
• Executive level decision
• Cash flow may trump all
Construction Cost and Market Factors
11
Impact
Each of these categories can affect a bid by 5 -10%
Collectively the total combined effect can exceed 30%.
Competition or the lack of competition is a major
factor in how these issues are assessed and how
the final bid is prepared
Competition explains why bids can vary so
dramatically in different markets
Remember these impacts affect primes, subs and
potentially suppliers
Construction Cost and Market Factors
12
Effect of Competition on Prices
1.25
1.15
Current
Marketplace
Bid Factor
1.05
0.95
0.85
0
2
4
6
8
10
12
14
16
18
20
Number of Bids
2004 – 2008
Marketplace
Source: Area Cost Factor Study, U.S. Army Corps of Engineers
Construction Cost and Market Factors
13
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
Total Nonresidential Construction
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
Year-on-Year Percent Change
Relationship of Nonresidential Construction and
GDP
40%
30%
20%
10%
0%
-10%
-20%
GDP
Construction Cost and Market Factors
14
Regional Variations
Nearly all regional markets have remained competitive
Some areas remain hyper-competitive
•
•
•
•
Florida
Nevada
California
Michigan
More moderate
• Washington DC, parts of the northeast
• Energy producing states
Key
• Where private investment is lagging, construction is likely lagging
Construction Cost and Market Factors
15
Summary – What drives volume and pricing
GDP drives
construction
spending
Construction
spending
drives
competition
When GDP is
robust,
spending
increases.
When GDP is
weak,
spending
drops
When
spending
increases,
prices rise.
When
spending
drops, prices
drop
Caveats:
• Major additional
increases in
public spending
• Significant drop
in supply –
bankruptcies and
downsizing
• Other events
Construction Cost and Market Factors
16
Long Term Issues to Consider
Gross Domestic Product
(GDP)
Government Spending
• Even if there is a substantial increase in GDP, construction spending is a
lagging indicator that tends to follow GDP increases by at least a year.
• This will tend to keep prices low even after a GDP increase.
• Government “stimulus” spending is all but complete
• While the overall impact on the industry is not yet clear, “grants” can
have a profound effect on localized activity and therefore pricing.
Inflation and Debt
• The increasing federal debt has the capacity to stifle private investment
and also lead to general economy inflation of over 5% or more.
• General inflation would spill over to construction labor and material
costs, raise prices and also increase the cost of capital to fund
construction. This will tend to increase cost.
• Energy cost is now problematical
Supply Constriction
• Many contractors, subcontractors and suppliers are barely managing
cash flow and with recent bids offering modest if any profit, a large
number may fail in the coming years. This reduces competition and will
eventually increase costs.
Overseas Competition
• The economies of China and India, in particular, are still booming and
will continue to compete for natural resources, contracting capacity and
investment of capital. The net effect tends to raise prices.
Alternate Delivery
Methods
• The move to negotiated contracts, design-build and integrated project
delivery (IPD) all present significant advantages to owners but have the
collateral effect of potentially reducing competition.
• Care must be taken to assure a fair price is paid.
Construction Cost and Market Factors
17
Examples
18
Project Examples
County Courthouse,
Florida
• Estimated at $400/SF in 2007 and put on hold
• Bid in early 2010
• 10 prime bidders
• Low bid at around $200/SF
• Some modest scope and quality adjustments
Federal Courthouse,
Florida
• Bid in 2007, two bidders
• 25% over budget, put on hold
• Rebid in late 2009, 8 prime bidders
• Low bid at 5% below original budget
• Full scope and minimal quality adjustments
School Project, New
York
• Originally bid in August 2008
• Two bidders
• 20% over budget and put on hold
• Rebid in Early 2009
• 8 bidders
• Low bid at 20% below budget
School Projects,
Virginia
• Elementary Schools
• One – Bid on late 2007
• Two bidders
• $155/SF
• Other – Bid mid 2009
• 13 bidders
• $124/SF
Construction Cost and Market Factors
19
Projections
20
US Economic Forecasts by e-forecasting
U.S. Quarterly Forecast of GDP and Key Indicators June 2012
Construction Cost and Market Factors
21
Construction Industry Statistics
("Statistics Brain"
Website)
Statistic Verification
Source: US Census Bureau
Date Verified: 4.11.2012
Construction Industry Statistics
US Construction industry annual revenue
Number of construction companies in the US
Number of construction company employees in the
US
Average construction company employee salary
Construction Company Type Statistics
Construction of Buildings
Heavy and civil engineering construction
Specialty trade contractors
States with the most construction companies
California
Florida
New York
Texas
Illinois
Pennsylvania
North Carolina
New Jersey
Annual Revenue
$1.731 Trillion
729,345
7,316,240
$45,200
Value of Annual
Number of Companies Business
211,956
$748 Billion
39,439
$260 Billion
477,950
$722 Billion
Number
72,173
51,143
43,409
37,200
30,236
28,505
25,457
23,142
Construction Cost and Market Factors
22
Inflation, Escalation and Market Factors
Usually
measured
by the
Consumer
Price Index
(CPI)
Is both
national
and
regional
Escalation is
the general
increase in
the cost of
labor and
materials of
construction
Generally
follows
inflation
But, may
not,
depending
on the
drivers
(steel from
2004 to
2008, for
example)
Market
factors affect
the cost of
individual
projects
Is a
function of
competition
Tends to
be area
dependent
Inflation is a
function of
the general
economy
Will often
trump
inflation
and
escalation
Construction Cost and Market Factors
23
National Cost Indices
1.60
1.20
1.00
0.80
Means 30-City Average
ENR Building Cost Index
Turner Building Cost Index
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0.60
1991
Cost Growth (2000 = 1.00)
1.40
Construction Cost and Market Factors
24
Bidding Factors and budgeting projects
Bid Factor = 0
• When economic growth and construction spending are all
in reasonable balance. This means an estimate based on
material, labor and reasonable indirect costs ( a “fair
value” estimate) will also reasonably predict bids
Bid Factor > 0
• This would indicate that demand for construction is in
excess of supply and competition would be limited. The
bid factor percentage would need to be added to the “fair
value” estimate as a premium to predict the bids. The
more dramatic the excess, the more significant the bid
factor.
Bid Factor < 0
• This would indicate that demand for construction is below
supply and competition would be enhanced. The bid factor
percentage would need to be deducted from the “fair
value” estimate as a discount to predict the bids. The more
dramatic the downturn, the more negative the bid factor.
Construction Cost and Market Factors
25
Annual Nonresidential Spending versus Bidding Factor
1970 – 2011 (Projections through 2014)
800,000
30%
700,000
20%
600,000
10%
500,000
400,000
0%
300,000
-10%
200,000
-20%
100,000
Bidding Factor % Change
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
-30%
1970
0
NON-RESIDENTIAL
Construction Cost and Market Factors
26
How will the market affect individual
projects?
Under
construction
• Cost already factored in
• Changes, especially delay claims will be
very aggressively pursued
• Bidding within a year – expect a
significant discount – 10%
Under design
• Up to 20% in depressed areas
• Beyond a year – consider up to a 10%
discount
• Design-Build – early pricing may not
reflect discounts
Alternate delivery
systems
• CM & GMP – likely will not show pricing
comparable to design-bid-build
• IPD – May be higher than DB
• Care to assure fair competition and a fair
price
Construction Cost and Market Factors
27
Advice on budgeting and delivering
projects
28
Managing competition and dealing with low
bids
Owners are aware of
the market to a greater
or lesser degree.
Owners also need to
understand that to
some degree they
control competition
directly and indirectly
through the perception
of their project by the
marketplace.
• They understand that prices are down and as a
result, their expectations may be growing,
• …and good markets cannot always overcome an
increased appetite.
• The contracts that are used, provisions for local
and disadvantaged business, paperwork
requirements, payment history, bonding and
insurance requirements, liquidated damages,
schedule, access to the site, security limitations,
environmental limitations and complicated
General Requirements
• All contribute to the marketplace’s response.
• In spite of a highly motivated market, care
should always be exercised on any and all of
these provisions.
Construction Cost and Market Factors
29
This process assumes one very important
condition
The bidding documents must be clear and represent
the full scope of the work
• Even if they are for preliminary purposes and not 100%
complete.
• If the documents are not clear and complete, then the low
bidder will likely be the one who excludes the most or who
makes the most limiting assumptions, making evaluation of
pricing problematic.
• Good documents are an important component of any
procurement process regardless of specific delivery method.
Construction Cost and Market Factors
30
Conclusions
• GDP drives construction spending
The relationship
between
economic
activity,
construction
spending and
pricing is clear:
• Construction spending drives
competition
• When GDP is robust, spending
increases - when GDP is weak,
spending drops
• When spending increases, prices
rise. When spending drops, prices
drop
Construction Cost and Market Factors
31
Conclusions
• They will likely continue for the foreseeable
future.
The dramatic ups
and downs of the
past years
presented a
number of
challenges
An intelligent
approach to
budgeting and
pricing is essential
• Intelligently factoring market conditions into
estimating and projections of bidding is an
important step in overall project delivery.
• Today’s marketplace continues to provide a
great deal, but it’s a challenge and requires
care
• Future is tough to predict, but it’s still unlikely to
change for a year and perhaps two
• It’s a great time to have money to build
• Keep an eye on the construction market –
especially in your local area
Construction Cost and Market Factors
32
Discussion
33