From increasing materials and labor costs to seemingly endless government regulations and the impact of an uncertain health care marketplace, higher sticker prices might seem like the inevitable answer to offset the rising costs of construction projects.
Construction contractors are holding the line on the bite-size costs taken out of their bottom line by striking a balance between schedules and workloads and creating shorter times for signing contracts.
For a recovering industry that took its share of hard knocks in 2008 with the Great Recession, hiking prices to customers isn’t always the answer, and it’s often impractical.
“There are some costs that we can pass along to homeowners, and some I have to eat,” said Keith Hoeing, president of Erwin Forrest Buildings LLC in Salisbury Township.
Construction firms walk a fine line. On one side is balancing the higher cost of doing business while on the other are creating sufficient profit margins to keep the business moving forward. All while maintaining happy customers willing to do business again and to make word-of-mouth referrals, the gold standard in a competitive marketplace.
Hoeing said while he never compromises quality, he also doesn’t see an end to higher material and labor costs anytime soon.
Costs aren’t likely to drop in the next six to 12 months, and that means learning hard-won lessons from nearly a decade ago, so as not to repeat them, Hoeing said.
HIGHER STEEL, LUMBER COSTS
Higher material costs for metals in I-beams, or reinforcing steel, and escalating framing lumber costs are some of the items driving up bids for new home construction, according to Chuck Hamilton, executive officer of Lehigh Valley Builders Association in Allentown.
Keeping a keen eye on business growth and not maxing out schedule capacity are ways to avoid getting burned again, Hoeing said.
In a volatile marketplace, the old adage of buyer beware is just as appropriate for the seller.
“Once we sign a contract, if prices go up, that becomes my problem,” Hoeing said.
He said one way to keep costs from cutting too deeply into profit margins is by working backward from the total anticipated budget, while also helping customers get the most bang for their buck.
TOUGH TO GET PRICES
On the commercial construction side, Sean Boyle, president of Boyle Construction in South Whitehall Township, said because no two jobs are alike it’s tough to determine how higher labor or material rates affect the bottom line.
What has become more difficult, though, is finding qualified subcontractors for trades such as masonry or plumbing, because of the uptick in work.
“Three years ago, you didn’t have to call anybody; they called you,” Boyle said. He said today, he might have to pass on bidding a job because he can’t get enough coverage on all trades to do a job.
“They’ll tell me, ‘Call when you get the bid.’ Subcontractors are busy. Getting budget prices are hard and coverage is harder,” Boyle said.
BIDS EXPIRE FASTER
Contractors are only holding bid costs for 30, 60 or 90 days because of the variability of materials pricing, said Kevin Lott, council representative for Lehigh Valley Carpenters Union Local 167 of the Northeast Region Council of Carpenters in Allentown.
Lott said the recent surge in metals costs used to produce I-beams along with other materials was driving up prices.
“It’s one of the reasons bid numbers were only good for brief periods of time,” Lott said.
BEYOND THE INDUSTRY
Rising costs haven’t affected employability so far, Lott said.
“We’re at 100 percent employment in the Lehigh Valley right now,” he said. “It’s amazing, because it really does affect the bids.”
While the most obvious job impact to new construction is skilled labor and worker employment, Hamilton said, other professions are affected by the industry’s health and stability.
“Other employment opportunities are generated for professionals such as architects, engineers, real estate agents, lawyers and accountants who provide services to homebuilders and homebuyers,” Hamilton said.
FEES, REGULATORY CHANGES
Beyond labor and materials, additional factors beyond the construction vendor’s control affect the cost of doing business and can mean the difference between an industry boom or bust.
“A larger financial impact occurs when government imposes fees or makes changes in regulations,” Hamilton said.
Government regulations are becoming a larger and more costly piece of the pie, according to Larry Kehres, president of L.A. Kehres Building and Remodeling Inc. in Bern Township.
He said his business was affected more severely by escalating government compliance regulations, including health care costs, than by rising material and labor costs.
COST OF COMPLIANCE
According to a 2016 study by The National Association of Home Builders, roughly 24.3 percent of the cost of a new home is made up of the cost of government regulations.
Hamilton said permits for stormwater discharge on construction sites can lead to delays and increased costs of filing for a permit.
“Environmental issues and [compliance] with Department of Environmental Protection are causing me issues,” as is the rising cost of offering health care, Kehres said.
“These are bigger issues,” he said.