Six Ways to Control Construction Costs in a Volatile Materials Market
"Since December 2003, the overall cost of construction material has climbed 41 percent, not including distribution costs. For comparison, the cost of consumer goods has increased 19 percent."
-Ken Simonson, chief economist for the Associated General Contractors of America
If you're a general contractor you've seen price increases far more than 41% since 2003, especially metals and petroleum-based materials. This article proposes 6 strategies for controlling your costs and closes with several resources for further investigation.
The sections are:
1) Know What Accountants Look for During an Owner Audit
2) Be Aware of the Market and Stockpile Materials
3) Stop Material Theft on Your Jobsite
4) Find Value Engineering Opportunities
5) Know Your Cost Estimator
6) Cost Projections and Contingency Planning
7) Recommended Construction Cost Saving Resources
1) Know What Accountants Look for During an Owner Audit
A rise in capital costs will result in a rise in owner expense audits as owners try to tighten down. A familiarity with what audits turn up will help you during the cost estimation phase... you may be unwittingly setting yourself up to lose your shirt.
Some of the major things owner-auditors look for include: all your cost-reimbursable contracts, discretionary benefits you provide that aren't legally mandatory, statutory limitations in payroll taxes, inaccurate pension and profit sharing claims for employees, computer costs and accounting costs (overhead) included as labor costs in the project. These items are covered in more detail in Understanding the owner’s right to audit construction costs.
2) Be Aware of the Market and Stockpile Materials
We're now out of the era of reliable supply chains. This means higher prices. It's your job to stay up on the materials markets using resources like the AGC's Construction Inflation Alert (pdf). One way to manage the sometimes dramatic cost fluctuations is materials stockpiling.
This is an old but effective technique whereby you purchase and warehouse large quantities of materials at prices that you speculate will be lower than when the project starts. This flies in the face of "just-in-time" materials management and brings with it a new host of issues, the least of which is warehouse management. This method won't be right for some companies, but it's worth investigating
3) Stop Material Theft on Your Jobsite
As material costs increase so will material theft. These costs go beyond replacement - you suffer the loss of time and ready cash replacing materials. Then you have to wrangle with your insurance company to get your money back. All this contributes to significant damages to your bottom line and even your reputation.
We've written extensively on stopping construction site theft. Here are a few articles to help you increase your jobsite security:
9 Ways to Stop Construction Theft During Holidays and Vacations
Reducing Employee-Driven Job Site Theft
How Secure is Your Construction Security Fence? 11 Questions to Ask
5 Security Lighting Tips For Your Construction Site
Also, investigate our construction site security services. We use live video surveillance to stop construction site thieves.
4) Find Value Engineering Opportunities
According to Wikipedia, "Value engineering is a systematic method to improve the "value" of goods and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost."
In our language that means build only what you need. An example I read suggested that if you know a given conference room won't have high traffic then don't cover the floor with high traffic carpeting. Save it for the hallways. Extend this thinking across your project and you will see significant savings.
5) Know Your Cost Estimator
Matt Stevens is a construction business consultant. I found this quote on bidding and hope it can be a guide for you when you're estimating cost or working with your existing cost estimator: "Being low is not success, being right is." Estimating costs is a science, and well worth studying.
Spend some time reading through Cost Control, Monitoring and Accounting by Chris Hendrickson of Carnegie Mellon. It provides - at the very least - a good basis for figuring out what are the right questions to ask.
6) Cost Projections and Contingency Planning
Does your contract identify and prepare you for potentially skyrocketing material costs? Because estimates happen so far in advance of project completion you may need to build a plan, if not allocate funds, to safeguard against a major cost increase.
Make sure that the "trigger" for the plan is perfectly clear in the contract and that the owner is on the same page. The contractual language will be vital if and when you face an owner audit for overages.
7) Recommended Construction Cost Saving Resources
Construction and Materials Outlook: Sinking Demand, Higher Costs
Keep costs down: Understanding the owner’s right to audit construction costs
Surging Material Costs Call For New Construction Strategies
Managers need to buff crystal ball to forecast construction costs
Construction costs
Contingency / reversion plans
Project Management for Construction
Ten Ways to Reduce Residential Project Costs
Raise the Roof, Lower the Costs: Construction Costs and Housing Affordability in New York City
