Construction contractors should analyze trends in labor and material costs to ensure job cost estimates are as accurate as possible. Otherwise, cost-cutting measures will be necessary to make a profit.
Labor Costs - An improvement in the economy means that more money is available to hire staff. It also means that companies are paying more in insurance premiums, as well as for other benefits. Additionally, due to the shortage of workers in the construction industry, companies must pay higher wages, especially to management, to attract talent. Many factors are causing a labor shortage including the Trump Administration’s position on immigration, the lack of interest in being in the trade by the younger generation, as well as the fact that the industry has not yet fully recovered from the Great Recession.
Tradesmen took jobs in other industries during the recession while many foreign workers returned home to find work. The construction industry lost more than 40% of its workforce from April 2006 to January 2011, cutting almost 2.3 million jobs.
Managing Productivity - Controlling labor activity at job sites is a concern for contractors. Labor productivity can be measured as functional units per labor hour for each type of construction task. Specific tasks can be monitored using either higher-level or lower-level measures. Miles of highway paved per hour is an example of a higher-level measure and cubic yards of concrete placed per hour a lower-level. Individual activities are easier to monitor using lower-level measures, while higher-level measures may be better for comparing your company’s overall performance against industry standards.
It is important to track productivity trends over time. Month-over-month and year-over-year production statistics should be analyzed, especially when labor and material costs are on the rise. Contractors should also benchmark their performance against industry standards to ensure job costs are in alignment with the competition. Study regional and national data, as well as indices compiled by creditable sources on performance by craft, project size, type, location, and other major project influences.
Material Costs - The Producer Price Index released by the Bureau of Labor Statistics for February 2017 showed an overall 4.8% increase in the cost of softwood lumber, gypsum, ready-mix concrete, and oriental strand board (OSB). The increased demand for residential and commercial real estate, as well as the need to work on country’s infrastructure is driving the demand for construction material. Other factors such as energy prices, globalization and trade agreements also have an impact on material costs.
The cost of softwood lumber increased 4.8%, the biggest rise in four years. Some types of softwood lumber rose as much as 30% in the three-week period between January 27 and February 17. The trade dispute between the U.S. and Canada has a lot to do with the price increase. The one-year extension of the Canadian-U.S. agreement expired last October. Since then, homebuilders have rallied to encourage U.S. manufacturers to increase production and import lumber from other countries. In addition, the U.S. government is attempting to decrease Canada’s market share from 28% to 22%. Construction contractors should plan accordingly.
The Random Lengths Framing Lumber Composite Index was at $391 on February 10, up from $366 on February 3. This was the highest single-weekly increase since August 2003. Even so, the weekly price index has either held steady or slightly declined since February 21. Gypsum prices increased 5.3% in February, the largest monthly increase since February 2015. OSB and ready-mix concrete prices climbed 3% and 0.5% respectively in February. The price of rebar is also on the rise.
Managing Material Costs - Although there is little a contractor can do about the rising cost of construction materials, there are ways to manage the impact on the job site. Minimizing procurement or purchase costs is important to controlling costs. Decisions about material procurement are required during the job estimate, initial planning and scheduling stages.
Contractors must plan for the timely delivery of materials. If materials are purchased too early, capital may be tied up and interest charges incurred on the excess inventory of materials. Materials might be damaged during storage or stolen unless special care is taken. Delays and extra expenses may be incurred if materials required for certain activities are not available when needed. Using a materials requirement and management system can help project managers meet purchasing requirements.
Looking Forward - Contractors need to pay attention to national and international policies on immigration, importing, tariffs and trade agreements that could impact prices. Although no one can predict the full impact, it is wise to take into consideration fluctuating labor and material costs when estimating jobs.
Feel free to contact either Michael Mazur, CPA, CFF, Managing Principal - New Jersey Office (Michael.Mazur@MCC-CPAs.com/732-341-3893) or me (Marty.McCarthy@MCC-CPAs.com/610-828-1900) to discuss any business issue you might have. We are always happy to help.
