JUNE 2021
Delivering Successful Projects in an Inflationary Environment: Market Insights for Our North American Clients
Delivering Successful Projects in an Inflationary Environment: Market Insights for Our North American Clients
It’s been 30 years since North America went through a significant inflationary period. Today, steeper escalation is back—and it’s impacting owners, architects, and builders, alike.
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Why is it happening? Population growth in specific markets across North America has spurred the need for more educational facilities, hospitals, offices, and residential developments. But supply chain disruptions caused by the pandemic, winter storms, shipping issues at the Suez Canal, and gasoline shortages in the southeastern U.S. mean that the labor and materials needed to make these buildings are not readily available. Moreover, the inflationary pressures created by these supply chain disruptions are now being exacerbated by the relatively quick reopening of the U.S. economy. Throughout 2020, as uncertainty from the pandemic dominated news headlines and a scarce material supply caused prices to hike, builders focused on expanding their backlog through more aggressive fee competitiveness. But as the world economy reopens in 2021, and as material prices continue to be volatile, fee competitiveness is at risk of returning to a pre-pandemic level. That means the cost of building is likely to increase.
How can architects, clients, and industry partners deliver great projects as inflation continues?
Plan
Engage in Early Conversations with Partners
The adage “plan the work; work the plan” holds
Communication with the selected construction
true, here. While ever important in design and
manager, general contractor, manufacturers,
construction, planning becomes critical to success
suppliers, and distributors are important in an
in an inflationary period—especially on large
escalating market. They know what is going on
capital projects. Invest time in mapping out the
“on the ground” and can offer sound guidance,
project schedule and identifying your
which often leads to early procurement of
cost-driving materials.
long-lead items.
Understand the Micro-Market
Build Contingencies and Alternates
Get to know the construction climate in the tight
Projects should always carry an adequate
geographic market where you’re designing and
contingency, but now is the time to advocate for a
building. Cost consultant Currie & Brown notes
percentage that makes sense for your project. It’s
that sites just 100 miles apart from each other
part of good planning. But also, it protects against
can have dramatically different market
unforeseen conditions and market headwinds
conditions driven by local demand for labor or
prompted by production ramp-up.
limited competition.
Alternates create competition, and competition is favorable to project cost. It’s also wise to specify clear alternates so clients have a choice— especially on higher-cost building products.
...sites just 100 miles apart from each other can have dramatically different market conditions...
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Be Mindful of Product Substitutions
Explore Collaborative Project Delivery
With increasing financial pressure on contractors,
Solutions-based incentives and approaches
product substitutions can offer savings of both
can lead to the best outcomes. These delivery
time and money. However, if a substitute product
strategies drive collaboration and shared
is not of equal quality, the design outcome can be
responsibility between the architect, construction
compromised, and the owner may realize longer-
team, and owner. Ultimately, they mitigate
term maintenance issues. Not all substitutions are
tensions that may arise from uncontrolled value
bad, but they must be carefully evaluated.
engineering, increasing costs, schedule extensions, and fee pressure.
Lock in Early Pricing
Although Construction Manager at Risk (CMaR) is still the predominant method of project delivery
To have predictability in both cost and schedule,
in North America, Progressive Design Build has
early bid packages for items such as steel,
been an increasingly popular approach for clients
foundations, glass, specialty lighting, and finishes
looking to expedite their project timelines. The use
may make sense. Knowing these costs early on
of Progressive Design Build has been expanding
can save time in value engineering later. Currently,
on the West Coast of the U.S., and its adoption
there is high volatility with copper,
is slowly moving eastward. It focuses on a more
PVC, galvanized sheet metal, and lumber; prices
collaborative approach for the owner, architect,
have increased exponentially in recent months.
and contractors, while allowing the owner to
For projects requiring high quantities of any of
maintain full decision-making power. Progressive
these materials, we advise you to get hard quotes
Design Build allows for the evaluation of multiple
as early as possible. That way, you can avoid
materials and system solutions, as well as access
any surprises.
to projects cost and schedule, all while preserving functionality, operations, and overall design intent for the client. Broad adoption of true three-party contracts, such as Integrated Project Delivery (IPD) and Public Private Partnerships (PPP), is still limited.
How can architects, clients, and industry partners deliver great projects as inflation continues? (continued)
Forecast for the Short Term Material pricing increases driven by supply
The chart below represents the increase in price
shortages will be an unavoidable part of 2021,
for a basket of goods used on construction
and likely 2022. Plan accordingly. Escalation
projects from January 2020 to June 2021.
should be considered at 4% to 6%, given the
The gray line represents construction-related
conditions of the local market and duration of
commodity prices, and the orange line represents
the project.
prices tracked from construction projects managed by Currie & Brown. Both sources show an increase in construction material prices of over 30% since early 2020.
Construction Material Price Index CONSTRUCTION MATERIALS (CURRIE & BROWN)
CONSTRUCTION MATERIALS (COMMODITIES)
140 135 130 Source: Currie & Brown 2021
125 120 115 110 105 100 95 90 01/01/2020
07/01/2020
01/01/2021
04/01/2021
07/01/2021
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Forecast for the Long Term
Time-Tested Truths
As we move into 2022 and beyond, supply will
Successful partnerships are based upon honesty,
eventually balance with demand, and contractors’
performance, and trust. In uncertain times, project
margins will return to normal. With that said,
teams and clients seek clarity amid complexity.
materials and labor costs will continue to increase
Projects of all sizes are important to clients. These
as the economy grows (this is a regular and
considerations can be challenging to accept
naturally occurring phenomenon), so an annual
and plan for, but doing so is vital to the success
escalation of 3.5% to 5% is still likely to be a
of a project, and to the longevity of professional
constant for the foreseeable future.
relationships.
These considerations can be challenging to accept and plan for, but doing so is vital to the success of a project, and to the longevity of professional relationships.
This paper was prepared by Gina Berndt and Tyson Curcio from Perkins&Will, in collaboration with Currie & Brown representatives Chad Chapman and Rachel Personius, as well as Turner Construction representatives Rick Blair, Attilio Rivetti, and Gregory Mulac.