By Daniel A. Traina, EIT
Anyone working in the construction industry or who has been given the responsibility to facilitate a construction project, has experienced a great deal of volatility and extreme price increases in the last two years. More recently, in the past six months, this trend has continued and in some areas even become worse. Some material prices have escalated so quickly that many projects have gone from being on budget at concept or schematic design to being significantly over budget by the time design is complete and the project is ready to go to bid.
According to the Bureau of Labor Statistics’ Producer Price Index for the prior one year period ending April 2022, producer prices for goods have increased by 16.3% (citation: https://www.bls.gov/opub/ted/2022/producer-prices-for-goods-up-16-3-percent-over-the-year-ended-april-2022.htm). As a theoretical example using this 16.3% to put things into perspective imagine a $10,000,000 cost of construction project. The material component may be about half, or $5,000,000. So if this job is first budgeted at concept in April 2021 it would have experienced an $815,000 ($5,000,000 x 16.3%) increase in material only by the time it is ready to go out to bid. It is not uncommon for the design process to take a year (or more) from concept to the time of bidding.
These issues are difficult to navigate, even for experienced teams of construction professionals. One tool which can help to get a project back on track is the process of Value Engineering. A project team needs to collectively consider all aspects of the job and discuss all savings possibilities. This process should start with brainstorming. An idea should not be withheld or not shared for fear that another team member won’t agree with said idea. By withholding ideas some of the best savings opportunities may never be considered. A proper Value Engineering process allows the owner the opportunity to decline any given idea. In order to make an informed decision the owner should be provided with a rough idea of cost savings and any comments on impacts from the design team. Every project is unique; here is a brief list of possible items to start with the next time cost savings must be studied.
- Can an alternate structural system be used for either the substructure or superstructure?
- Can the level of finish be reduced in certain areas of the building?
- Are there product substitutions which are more economical?
- Can an alternate mechanical system be substituted?
- Are there alternate means of construction which could save construction time, and therefore reduce general conditions costs?
Welliver has successfully used this Value Engineering process on a number of projects in the area to help bring over budget projects back on track. Post bid I have personally gone through an extensive Value Engineering exercise on four larger projects ($10,000,000+). In one case the list of value ideas was over 100 items long and in all cases construction costs were reduced by between 10 and 15%.
Another proactive approach to protect a project’s budget is to build an appropriate escalation factor into the estimate right from the start (most often concept or program estimate). This has always been a standard practice but carefully adhering to this practice is more important now than ever. Early in a project there may be temptation by the team to cut back on markups such as escalation in order to progress a project and make financial numbers work, but given recent market conditions this approach is dangerous and may create an impossible project down the road.
Feel free to reach out to myself or any of your existing Welliver contacts for assistance with pre-construction cost estimating on your next project. Engagement early on has the biggest potential for positive impact on your project.
Dan brings more than 10 years of construction experience, an extensive cost database, and current bid market trends to every pre-construction estimate and competitive project bid. He has an impressive background in engineering and design, which he draws from when performing cost analyses, unit pricing, value engineering, and constructability reviews. Experienced working with numerous state-of-the-art technical software programs, Dan provides accurate and realistic project estimation, a proven value to his client’s decision making process. As Lead Estimator for Welliver, Dan leads the execution and delivery of estimating services for a substantial number of highly complex and significant projects for clients representing a broad range of market sectors including higher education, industrial, healthcare, and commercial/residential. Dan can be reached at [email protected].