Over the past few years, there have been frequent discussions with our clients related to what we are seeing in the market when it comes to material and subcontractor pricing.
Since the pandemic, material pricing has been an extremely volatile part of our industry. These changing conditions have required everyone to adopt various strategies to get deals done. These strategies range from forms of procurement to combating escalation and much more.
As you can see in the table below from US Bureau of Labor Statistics, pricing is up substantially from where it was pre-pandemic. Overall project costs are up over 34% depending on type of construction. The table also indicates that continuous inflation has had a heavy impact on construction costs. According to the US Bureau of Labor Statistics, the dollar had an average inflation rate of about 5.53% per year between 2020 and today. The result has been a cumulative increase of 17.51%.
In an effort to control inflation and slow rising costs, the Federal Reserve has been raising interest rates. Since March of 2022, the Fed has issued ten straight interest rate hikes with a cumulative gain of five percentage points to their policy interest rate. While they chose not to raise rates again this month, they mentioned two potential additional increases before the end of the year, as they continue to combat inflation. The increases have spiked borrowing costs, slowing activity in the residential construction industry and contributing to starts sliding in the commercial world. Ultimately, this slowdown has allowed for some suppliers to build their inventories, leading to a decrease in cost for some areas (e.g. lumber).
It’s likely that prices will continue to decrease slowly until activity picks up once again. However, if we were to go into a recession as many have speculated, we will be hard pressed to return to the pricing levels we experienced in 2020.
Vice President, Construction
The Douglas CompanyRead More >