CHICAGO — As COVID-19 continues to impact the world’s economy, one of the main questions inside the construction industry is, “What will happen to pricing?” Can we expect to see a major reduction in pricing, will it hold steady or potentially increase?
Before addressing this, let’s start by defining the main factors that impact construction pricing.
Supply & Demand: Construction pricing is highly sensitive to the forces of supply and demand. Cutting pricing is inherently risky and can equate to a lot of work for little or no reward. Thus, when demand is high, construction pricing increases to reduce this risk.
When demand decreases, however, contractors are willing to pursue riskier projects at reduced pricing to keep their businesses moving forward.
Backlog: Backlog is the amount of construction work currently on the books. When the economy is strong, backlog and pricing increase, creating a buffer. This buffer causes a lag in how quickly construction is impacted by, and reacts to, current economic conditions.
Labor Costs: Construction is labor intensive. It is difficult to run wire, hang pipe or lay block without skilled labor. Because of this, a large portion of construction costs are determined by labor expenses.
Wages increase as the cost of living goes up and construction costs follow. This explains why the cost of construction is higher in New York City, Northern California and other regions with a higher cost of living.
Commodity Pricing: Commodity pricing plays a role in determining construction costs as well. When oil prices go down, so do petroleum-based products, such as insulation, asphalt and roofing materials. When steel prices increase due to new tariffs, the cost of joists, metal panels and pipe increases accordingly.
No single factor drives construction pricing. Numerous economic forces have varying degrees of influence, and this makes predictions about pricing somewhat challenging.
We currently know that demand for new construction is decreasing due to a contracting economy. Contractor backlog is beginning to shrink, and commodity prices are low. These three indicators point to an impending reduction in construction pricing.
Because the construction industry typically lags the economy, an economic inflection does not equate to an immediate reaction. Instead, prices hold steady while the industry works through its backlog and assesses the economic situation. Then, as backlog levels begin to deplete, contractors are willing to take more risk and lower their pricing to secure additional work.
Once the forces of supply and demand, backlog, labor costs, and commodity pricing reach a new equilibrium, construction pricing will level off, maintaining this new baseline until demand begins to increase once again.
So, what will happen to construction pricing? Currently, it has leveled off and will stay flat as contractors continue to work through their backlog. Then we expect pricing to become more aggressive as backlog begins to shrink.
However, these are unprecedented times. Predicting when and how prices might decline is, at best, a guessing game that does not necessarily lead to a fruitful construction experience.
Ultimately, success is determined by working with a proven construction partner that can lower your risk and improve your return by:
- Clearly defining the scope of work.
- Locking in firm pricing early in the process.
- Developing creative solutions.
- Minimizing project delays.
- Delivering as promised.