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Will your project survive bid day in the era of rising construction costs?

May 22, 2024

Brian Goodreau

Vice President - Pursuit Director

The construction industry in the United States, as highlighted in the Arcadis International Construction Costs 2024 report, is experiencing a significant surge in costs, particularly in major cities like New York, Los Angeles and Boston. I've noticed that this budget issue can crop up on projects of all sizes, but it really stands out on the larger ones, especially those over $100 million, across different sectors like manufacturing, tech, water/wastewater and transportation. Because of this cost escalation, major capital projects are sometimes facing nearly doubled costs at bid day, leaving owners and developers grappling with inadequately planned budgets.

Based on my observations, having been involved with hundreds of projects over the past few years, the primary reasons for underestimation often do not stem from inadequately developed cost estimates. Typically, there is precision in performing quantity takeoffs and calculating the tangible “bricks and sticks” costs of construction. Instead, where estimates tend to fall short is in the failure to recognize significant cost-driving factors that can fluctuate substantially due to market conditions. These factors encompass aspects such as the anticipated number of bidders, the availability of skilled labor, disruptions in the supply chain, or the market capacity of potential bidders, all of which play a critical role in the accuracy of estimates. To address these challenges, early and vigilant cost management, value engineering, and comprehensive risk management are crucial. This blog provides essential tips for successfully navigating the complexities of today's construction landscape and achieving prosperous project outcomes.

In recent years, bid day has brought an unpleasant surprise for some owners and developers, as they experience a scarcity of bidders and exorbitant prices for their projects. In the current market characterized by a high demand for contractors, owners and project developers need to evaluate how their project will be perceived by the contracting and subcontracting community in terms of complexity, risk and profitability potential. This assessment is crucial as projects vie for the same resources within the region, necessitating a comparison with other projects to determine attractiveness. In certain cases, we have witnessed bids come in at nearly double the initial estimates, leaving owners and developers taken aback by the unexpected escalation in costs. Stakeholders are typically cognizant of the elevated construction costs in today's market, yet they are frequently taken by surprise at the extent to which these costs can escalate. These circumstances have forced them to grapple with tough decisions, like where to cut back to save money on their projects, and have raised important concerns about funding sources, the impact of high borrowing costs, and the potential return on investment for their projects. Additionally, the inflated bid costs exert significant strain on the capital budget for other projects in their portfolios, creating a ripple effect of challenges.

To address these challenges, a different approach to cost management is necessary—one that begins during the pre-planning stages and continues throughout the duration of the project. Cost estimates, which serve as a control point for keeping the design aligned with the desired project budget, should be obtained from credible estimators and validated through a second opinion from another experienced firm to obtain a realistic view of project costs in today’s market, helping owners and developers understand what to expect in terms of cost and eliminating surprises on bid day.

Additionally, value engineering, when conducted early in the planning process by qualified, certified value specialists, offers the opportunity to incorporate lower-cost alternatives into the design without sacrificing key project features. Waiting until the design is nearly complete to implement value engineering often results in lost opportunities for cost savings and compromises the functionality of the asset. Furthermore, risk management and contingency planning are essential for anticipating potential fluctuations in the market, including factors such as labor availability, material prices and competition among bidders. Implementing robust cost management during the construction phase is equally crucial for mitigating budget overruns and scope creep.

The ability to anticipate and navigate the current challenges in the construction market is a hallmark of savvy project teams. By adopting proactive cost management strategies, owners and developers can build successful projects despite the prevailing industry challenges.

The International Construction Costs 2024 report underscores the importance of addressing rising construction costs through early and vigilant cost management, accurate cost estimates, value engineering and comprehensive risk management. By embracing these practices, owners and developers can enhance their ability to navigate the complexities of today's construction landscape and achieve successful project outcomes.

AUTHOR

Brian Goodreau

Vice President - Pursuit Director