Construction costs in the New York Metropolitan Area have rapidly escalated over the past six months, particularly in New York City.

This is especially seen in the public works sector: bid prices received are 20%-30% higher than budgets. For example, NYC Housing Authority (NYCHA) and NYC Department of Design and Construction (NYCDDC) have experienced numerous instances of this.

Several forces are at play creating this volatile cost climate.
 

First, Labor and Material costs have increased 5% during the past year (as reported by ENR Building and Construction Index) but this is just the tip, of the cost escalation, iceberg. When the construction market almost disappeared, after the economic bubble burst of late 2008, a slow increase in projects began and has increased dramatically in the last 6-9 months.

During this time, there has been a huge increase in mega projects: the new Tappan Zee Bridge; NYC Residential Towers, and hotel construction. In addition, many moderate-to-large size projects planned prior to 2008 and then shelved, have come back to life.

Also, the disaster of Hurricane Sandy proves the adage that: "An ill wind blows good for someone." Here, the construction industry continues to benefit from the glut of work produced by "Sandy" projects.

Obviously, the effect of all these new projects has dramatically escalated prices. The largest components of the escalation are subcontractor, contractor and GC mark-ups. These are not reflected in ENR reported labor and material increases.

Another factor, not reflected in the ENR escalation, is labor productivity. The labor pool is becoming stretched. Typically the most productive workers are first to be hired (in many cases they are "company men" with incentives to produce). As labor demand increases, less productive workers join the team. In construction, a crew quickly assumes the pace of the least productive member. The effect: decreasing labor productivity and increasing labor costs.

Also, many owners are signing Project Labor Agreements.  A lower-than-usual union rate is agreed upon.  While cost-effective, in theory, union workers will often "slow down" to prolong their jobs, thus increasing labor costs.

Finally, many contractors and subcontractors went out of business during the lean years and now there is less competition for more work.

Therefore, based on all the above, an additional 15%-25% increase (above ENR's 5% projection) in construction costs should be anticipated for the next 6-9 months.  It would be wise to adjust upward any estimated costs on projects not yet bid.