Construction costs in the US have been escalating for months now, and it’s so far the contractors who are carrying the weight of absorbing these price increases. This, according to a recent study by the Associated General Contractors, who went on to point out that recent tariffs on non-US foreign materials have further intensified the issue.
The Pain of Higher Construction Costs
The association’s chief economist, Ken Simonson points out that, "Many of these increases far outstripped the 4.3 percent rise in the price index for new construction – what contractors are charging to build projects, implying that contractors' profit margins are shrinking as they absorb some of the increased costs."
By driving profits down, private and public sector projects are at risk of schedule delays as contractors turn to claim back lost income through reducing their costs through employing cheaper labor, or a reduction in labor.
Price Increases Creating Urgency for Careful Management
Price increases are set to intensify even further as new tariffs kick in and goods purchased prior to the tariffs are used up. Contractors in fixed price or unit price contracts are stuck with submitting RFIs and Change Orders to pass some of the increases to the owner; but as we all know, this isn’t always achievable as the owners are also under budget constraints from their funding sources. In the occasions when these prices are passed through, this leads to budget overruns on capital projects – and are impossible to predict or control.
This creates a tricky predicament for contractors across North America who are already walking a fine-line of profitability; and creates a greater urgency for careful management of project budgets, project controls and overall vigilant project cost management.