Gilbane, family owned and managed since 1873, includes Gilbane Building Co. and Gilbane Development Co. These companies are into construction and real estate development.
Recently, Gilbane released “Construction Economics: Market Conditions in Construction.” Why look at this? Gilbane represents a major class of end-users of the things distributors sell. What are these customers and end-users talking about out loud?
Escalation
“Standard Escalation Index Tables Will Not Address the Inflection Points in This Unusual Time Period,” reads a sub-heading on page 34 in the report. Certainly, this is an untypical era in construction, but what does that sub-heading mean?
Gilbane explains what it shows in the “How to Use the Above Graph,” and in three pages discussing escalation in 2012-2014.
How to figure a building’s cost before building it
According to the Gilbane piece, “This will be a period of conceptual project budget preparation unlike any we have ever experienced. The critical issue is consideration of project time period being used as the baseline for future projection.
“Any baseline project from either the inflated or the depressed margin pricing era will need special attention to reflect an accurate projection of that project into future cost.”
What costs go into a project? The company’s statements:
- 40% = Labor. “Anticipated labor cost [escalation] of 2% to 3% a year.”
- 50% = Materials. Escalation = 2% to 3%.
- Gilbane wants to apply margins “on all costs” (100% of a project’s costs). Escalation: “Anticipate 2%/year increase to margins, unless activity picks up dramatically, then increase rate of margin growth to 3% to 4%.”
Near-term outlook
Escalation by year: 2012 = 4%, 2013 = 5-6%, 2014 = 7%
For 2013, “Assume moderately greater rate of growth in activity, which allows passing along most labor and material costs and increasing margins 2%.”
In 2014—assumed here is a “greater of growth in activity than 2013, which allows passing along all potentially inflationary labor and material costs and increasing margins 2% to 3%.”
Other notes
- Pages 1-33 document the construction scene as of late 2011 with plenty of well-sourced data. On construction inflation, the piece quotes Ken Simonson, the AGC economist who also writes for tED magazine and has his “The Data DIGest” posted on tedmag.com.
- Pages 21-22 cover copper. Of note is the answer to “What affect do copper price changes have on the cost of our projects?” The answer:
- “10% of an electrical contract, or 1% of the cost of a project.”
- “5% of an HVAC contract, or 0.6%.”
- “10% of a plumbing contract, or 0.3”
- “…therefore, a 25% increase in the cost of copper will increase the cost of a project by 0.5%.”