construction

Construction cost spikes affect business growth

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Normally, the cost of building materials inches higher to catch up with inflation — or jumps small amounts in response to rises in oil prices — but that isn’t the case right now.

Throughout the country, commercial and residential builders are seeing spikes in the cost of doing business as a result of a shortage of skilled laborers and increased demand that has put significant pressure on the cost of products such as lumber, drywall and other building materials.

According to the U.S. Bureau of Labor Statistics, lumber prices had risen 7.2 percent by the end of the first quarter of 2017 and were up 12.9 percent compared to the same time last year. The BLS report also indicated inflationary increases in other materials such as concrete and gypsum, which is most commonly used to produce drywall.

“Some of those commodities have gone up so that the companies can see an increase in the profit margins they’d like to see restored,” said Marc Towne, director of purchasing, estimating and design for Classic Homes. “We’ve seen concrete definitely do that. Other than that, the market hasn’t fluctuated as much as in the past.”

Kevin Remsen, regional manager for Builders FirstSource (formerly ProBuild), would disagree. Remsen said the company has seen a spike in lumber costs.

“Lumber is a commodity, so it moves with the market based on supply and demand,” he said. “We saw a huge spike — around 12-20 percent — on all lumber coming from Canada. That has softened a little bit, but it hasn’t really gone away.”

Remsen blames heightened demand for materials throughout Colorado for that spike, as well as a looming trade deal between the U.S. and Canada that many expect to result in additional tariffs on lumber.

“Growth, demand, regulations, tariffs — that mix really increases the cost to build a house,” he said. “As a distributor, we always try to manage our costs down, but when market factors increase our product costs, our only option is to pass the increases on. We lock our pricing for 60 days, the builders have to lock in their pricing to their customers, so when there is  a large spike in price like this it is very challenging to make a profit on any work in the pipeline.”

The company has seen a 14 percent increase in the cost of softwood goods since the beginning of 2015, Remsen said.

For many builders and their clients, those increases make all the difference.

Colorado Springs-based nonprofit Junior Achievement of Southern Colorado recently put on hold plans to construct its $3.8-million JA Center for Free Enterprise after officials learned that they were facing a financing shortfall caused by increased construction costs.

According to President and CEO Carrie McKee, the projected cost of the new building rose about 20 percent —  $135,000 — in just one year as a result of the labor shortage and increases in materials costs.

“We really shouldn’t have been that surprised when we went back and looked at what our construction costs were going to be, and they had increased substantially,” McKee said. “We all know that the economy is booming — both locally and nationally — and that the construction companies and subcontractors are now back to work. We also know that material costs have increased.”

For McKee and her nonprofit, the shortfall will result in delayed plans to begin construction with general contractor GE Johnson Construction Co. on the project while a years-long capital campaign continues.

“We had hoped in the next fiscal year to begin construction, but we’re going to take a strategic pause and focus on the next phase of this capital campaign so we can go into the project with fiscal solvency and sustainability,” she said. “We’re focused and ready to do that.”

Jim Johnson, CEO of GE Johnson, said it’s hard to be the bearer of bad news to organizations like JA.

“We’re seeing increases and we’re advising clients to expect about 2 percent [increases] a quarter,” he said. “That has been hard, but we try to minimize the impact and really communicate what’s going on to our clients, so that they aren’t shocked six months later.”

Johnson said that companies that routinely plan buildings — developers, hotel companies and hospitals — understand how the market works and are thus less affected by it. But the same can’t be said for organizations that operate with little to no profit margin.

“It’s harder, I think, on school boards and nonprofits who are out in the building landscape and haven’t seen this happening,” he said. “I think schools are hardest hit because they’re working off of bond issues. Now, those budgets are severely challenged, and they still have to deliver to the taxpayers.”

1 Comment

1 Comment

  1. Frank Kinder

    July 18, 2017 at 2:00 pm

    In other words, the market is working as it should.

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