Riding the Pine: How to Manage Rising Construction Material Costs

Commercial building is at a high point in Phoenix, and it has never been more exciting or challenging to be in the industry. Federally imposed tariffs — some as high as 25 percent — are making waves in commercial real estate, but it is just one of many contributing factors to the rise in construction costs. And the American Transportation Research Institute reported a driver shortage for the first time in more than a decade in 2017. This factors — along with tariffs on Canadian wood, domestic forest fires, and Hurricane Irma decommissioning a few U.S. sawmills — are responsible for driving up prices.

While rising materials costs may lead to a spike in bid prices industrywide, the following practices can help contractors keep overhead low:

Evaluate possible structural material changes. Early involvement in the design process allows contractors to quickly analyze how steel, concrete tilt, masonry or wood-frame structures affect a project’s cost and schedule. Instead of looking strictly at raw prices of commodities, it’s wise to consider structural integrity, schedule, aesthetics and long-term cost of ownership — and to bring all materials to the table before proceeding.

Cast a wide net for bidding contracts. Commercial real estate is seeing a lot of project backlog. Higher prices are also driven by a limited and underqualified labor force. To be most competitive in this marketplace, companies need to keep a deep bench of qualified subcontractor partners.  Finding the right subcontractor partner for a project sometimes means looking outside of Phoenix; forming partnerships in other major cities provides great supplements.

Secure a lumber rate early on in the building process. We have seen 10-percent swings in material prices in 2018. The strategy in this volatile market is to negotiate to the right cost for everyone and lock it in immediately. With short expirations of quotes, longer projects mean vulnerability to price escalations. Striking as soon as the number is right will mitigate risks.

Prefab materials to eliminate unnecessary labor costs. Along with pursuing material options as cost-saving or value-added alternatives, contractors can look to labor efficiencies to offset rising costs. Increasing efficiency and reducing time on the job saves money. Some design lends itself well to panelized wall, prefab bathrooms, unitized glazing systems, shop-assembled plumbing, electrical and mechanical components. 

The industry didn’t expect lumber prices to rise as high as they did from Q1 to Q2, but it remains the most affordable choice.

Chris Hundelt is a project executive at UEB, a general contractor with offices in Phoenix, Dallas and Seattle that specializes in healthcare, multifamily, institutional, hospitality and commercial projects.