Construction costs jump 5.2% over 2008

Construction costs jump 5.2% over 2008

With steel leading the way, Engineering News Record reports the following figures for March 2009:

20-CITY:
1913 = 100
MAR 2009
Index Value
% change
Month
% change
Year
Construction Cost 8534.05 0.0 +5.2
Common Labor 18015.79 0.0 +5.4
WAGE $/HR. 34.23 0.0 +5.4
20-CITY:
1913 = 100
MAR 2009
Index Value
% change
Month
% change
Year
Building Cost 4766.71 0.0 +4.3
Skilled Labor 8112.22 0.0 +4.1
WAGE $/HR. 45.02 0.0 +4.1
20-CITY:
1913 = 100
MAR 2009
Index Value
% change
Month
% change
Year
Materials 2722.66 +0.1 +4.4
CEMENT $/TON 101.73 -0.3 +0.5
STEEL $/CWT 44.90 +0.2 +9.1
LUMBER $/MBF 414.34 -0.2 -3.9

Read the entire report

The Dirty Project

It’s hard to believe spring is already knocking on the door.

We don’t have a lot of work this spring, but we’re feeling quite fortunate to have what we do. It was almost a year ago to date when I wrote in our newsletter about how great it was to have good clients that were excited to get under construction last spring. Somehow we are in the same boat again this year – great clients and great projects (just not many of them).

We’ve bid several residential projects over the winter with a myriad of General Contractors, where the winning bid has been around 30% lower than the median average bid. For the majority of the projects we’ve observed, the low bidder has predominantly been awarded no matter what the average of the bids have been. When the winning bid is below the actual cost of the “sticks and bricks” of the project – undoubtedly it’s only a matter of time before there is a problem.

Welcome to “the Dirty Project”…

We saw a little bit of the fallout in 2009 with low bidder contractors front loading projects and then bankrupting the business. Every once in a while you’ll hear a story of “that guy” being spotted somewhere in Aruba cuddled up to a 6′ hookah and some young Jamaican woman he calls Mama.

I think ’09 was only the tip of the iceberg for construction claims and fallout. As both sub and general contractors have most likely burned through the majority of their reserves in ’09 – the amount of fallout in ’10 should be staggering. The first to go will obviously be the ‘below cost” and “30% under” bidders who are just trying to keep their crews busy or make the next payment for their jacked up Ford or diaper polished Audis. So where does this leave the dirty projects? They will either be tied up in lawsuit or in need of troubled project turnaround – most likely both if history repeats itself from the construction collapse of the 80’s. It’s simple, a business can only sustain for so long doing work at or below cost.

Aside from the overall cost cut – the next to go is quality of construction. Even in small towns like Bozeman and Big Sky, it doesn’t take a rocket scientist to see what kind of crap was being built in 80’s. The current market really isn’t all that different with the amount of construction companies just trying to survive while making quality cuts just to be in the running of a “competitive” bid. Pastels, big hair and poor construction defined the 80’s – what will define construction in 2010?

I think the face of construction will change in coming decades, as well as the standards for building a custom home. Of course there will always be the rat race on specs as well as pre-sold units, but the current trend for high end custom isn’t sustainable with the value we put on our dollar and the high regard we generally hold to the quality of our homes. The high dollar commercial sector got wise to this in the late 80′ and early 90’s and started pushing negotiated contract and construction management services in lieu of the competitive bid/change order game. Twenty years later and the private residential sector still hasn’t caught on yet. Why is that?

Don’t get me wrong, there are a number of savvy Owners out there that see the value of negotiated bid and quality work as well as a handful of contractors that won’t succumb to the change order game or make quality cuts just to be competitive with an underpriced contractor.

How will your home be viewed in 10 or 15 years? Will it be a tear down just like the homes built in the 80’s or will it be a testament to maximizing the dollar of the recession?

Regards,
Chad Rothacher

Disclosure of Superior Information

The concept of “superior knowledge” or “superior information” is unique to construction contracting. Contract law in general holds a party responsible for intentionally withholding significant information in order to mislead the other party. This is usually characterized as “fraudulent misrepresentation” or “fraudulent inducement.”  With construction contracting, a project owner may be liable to a contractor for failing to disclose significant information even though the nondisclosure was not intentional or fraudulent.
The California Supreme Court recently issued an important decision on nondisclosure of superior information by public project owners. If a public project owner (1) possesses information which will affect the contractor’s bid price or performance cost; (2) knows the contractor does not possess that information; and (3) includes nothing in the contract documents which would cause the contractor to inquire about the information; then (4) the owner can be liable for nondisclosure of the information for any reason. No intent is required.

A dissenting opinion in the California case argued that public project owners, and the taxpayers, should not be exposed to liability for accidental or unintentional nondisclosure of information. The dissent said the majority’s ruling absolved contractors of any responsibility for independently investigating contract performance conditions and would foster extensive claims litigation.

From the Construction Advisor

Contract change order limitations

Change order limitations are sometimes imposed on public works contracts by statute, regulation or the contract itself. The underlying policy is to protect the project budget and the integrity of the public procurement process by limiting the expansion of the contractual scope of work. A limitation typically states that if the estimated cost of a change order exceeds a certain percentage of the original contract price, the additional work must be put out to bid.

Change order limitations can lead to devious tactics, however. In a recent California case a public project owner and its construction manager tried to circumvent a ten percent limit in a site work contract in order to avoid the delay of competitive bidding. New grading work was to be added to the general building contract and the building contractor would sub the work to the site contractor.

The project owner never amended the building contract and the building contractor wouldn’t pay the site contractor for the “subcontracted” work. The owner and CM settled with the site contractor. But when the site contractor sued the building contractor, the purported subcontract was ruled an unenforceable sham.

From the Construction Advisor

Did your contractor skip town with your $

When a project is in trouble, usually an outside party is brought in because the problems on the project are bigger than the current project manager realizes or can handle.  By definition, troubled projects have major problems. These problems sometimes include:

  • Financial concerns and non payment of sub trades
  • Over billing by the General or Prime Contractor
  • Difficulties in meeting milestones and/or completion deadlines
  • Failure in delivering anticipated benefits
  • Failure or unwillingness to allocate resources to the project
  • The project is consistently and/or significantly behind schedule
  • Significant and/or critical technical issues with the project

When called in to address a troubled project, RMR Group will review the work in progress, analyze past performance, review contract documents and solicit input from the client.  After a thorough analysis of the problems encountered, RMR can make recommendations with a detailed plan to get the project back on track.  If the project can be recovered, RMR generates critical path management (CPM) schedules; detailed, short interval work plans, equipment utilization planning, cash flow and budget projections, subcontractor requirements, and the financial remedies needed to support the project.  In short, we set up a full Project Management package similar to our Construction Manager as Agent delivery program.

Our highly skilled team works with clients to mitigate and resolve claims while supporting project progress. Unfortunately, not all projects are recoverable without addressing disputed issues. When projects cannot be turned around, or disputes not settled – RMR assists its clients with documentation and strategic planning for dispute resolution.