You can no longer expect bids to be significantly lower than the estimated cost of the project. While project estimates have been adjusted over the last few years for the lower costs, we have heard of projects where the actual bids were even lower. That time may be nearing the end.
The Turner Construction Cost Index, compiled by the large international construction company, Turner Construction, is continuing to show a trend started in 2010 with materials costs increasing and labor savings not fully offsetting the materials increase. Through 2011 and into the first quarter of 2012 we saw overall construction costs go up about a half percent a quarter.
Similar to Turner, Matt Woolsey of The Wool-Zee Co., Inc., a local cost estimating firm, has found a cost escalator of about 2.5% per year has been holding true. Matt says, “I think, and data shows that, after a couple of years of contraction in material and labor cost we are back to “the norm” of 2-3% inflation per annum for labor and material, this is in line with the broader economy’s inflation rate and is in line with anticipated inflation for the coming years.Ó
“What appears to have changed is that the marketplace has thinned over the last 3-4 years and we are no longer seeing “desperate” contractors bidding low numbers just to stay afloat. The contractors in the market now are sanely bidding projects at fair market value prices.Ó
However, others have seen significant short term increases in some projects. In a recent email, Sandra Matson of Matson Carlson Cost Consultants issued a construction cost warning:
“BID CLIMATE WARNING: THE PARTY IS OVER!! COSTS ARE RAPIDLY ON THE RISE!
We are now (April/May 2012) seeing project budgets exceeded by bids. And, it’s predicted that it will only get worse Ð especially with the summer months approaching.” Matson Carlson has done research into bid price trends by month of the year. Prices tend to rise rapidly in the spring and summer and come in lower in the fall and winter. This will be the subject of a future article.
While construction costs are still significantly lower now than they were in 2008, the market is clearly approaching the cost escalation we were used to four or more years ago.