February 17, 2015

Hot market pushing up construction costs here

Mortenson's quarterly cost index predicts construction costs in Seattle will rise 5 to 6 percent this year.

The index is a trailing indicator that Mortenson uses to spot trends.

Mark Wagner, chief estimator at the local Mortenson office, said construction costs were up 5.2 percent in Seattle over the past 12 months.

Construction costs here also eclipsed the “national” rate that Mortenson calculates from its offices in Minneapolis, Milwaukee, Chicago, Denver and Phoenix. Last year, the national rate was 4 percent.

According to the index, construction costs in Seattle over the past five years have mostly been above the national average.

Over the past two decades, the increase averaged 3.5 percent a year.

Wagner said the biggest reason for the jump is strong local construction, driven by high demand for new housing downtown and projects spurred by Amazon's growth.

Wagner said a lot of subcontractors and suppliers were hit hard by the recession — and reduced their capacity as a result.

“Now that the market is up, they are not too eager to grow,” he said. “Nobody wants to ramp up heavily to experience a market that won't remain that robust. Our own experience in the last quarter is a lot of trade contractors are running low on capacity.”

Wagner said reduced capacity can be found in subcontractors' shops where materials are fabricated and in the field with installation crews.

Labor makes up about 40 percent of the cost of a typical construction project, with mechanical and electrical being the largest trades.

Labor rates typically rise 3.5 percent yearly, but Wagner said there may be pressure from unions for bigger raises when Mortenson's labor contracts are negotiated in June.

Mortenson negotiates its own union contracts while many of the area's larger general contractors use AGC of Washington to represent them. Mortenson and the AGC will negotiate at the same time.

Wagner said it's hardest to find workers to install curtainwall and elevators. He said there isn't a lot of competition between subcontractors in those fields, and that can lead to higher prices.

Wagner said his company advertises its projects a lot so that subcontractors are aware of the work. He said it also tries to make projects attractive to prospective subs by providing building information modeling, which more clearly defines the scope of work, and 4-D modeling, which closes gaps in workforce scheduling.

“If they know when they are expected to be on-site and when they are expected to be finished, then you get a more competitive rate,” Wagner said. “There's less risk for them.”

The index shows costs for finish carpentry and roofing grew the most between the third and fourth quarters of 2014, with carpentry up 8.1 percent and roofing up 4.5 percent.

Wagner said the numbers reflect the availability of craft workers locally, but roofers in the Seattle market are traditionally priced higher than in the other markets. He said he doesn't know why that is, but it does rain a lot here.

Some local material prices declined over the quarter, namely flooring/carpeting, steel framing/stairs and structural steel.

Wagner said steel prices have a lot to do with demand, and most of the new high-rises in Seattle are apartments that favor concrete over steel.

The biggest consumers of structural steel are office buildings, municipal projects and hospitals, according to Wagner.

Another factor that is pushing down steel prices is the drop in demand from China.

“The steel market is becoming an increasing global market,” Wagner said.

Also, low oil prices have made steel cheaper to produce, he said.

How can owners reduce the risk of rising construction costs?

Wagner said he often gets that question.

One way is to have early procurement agreements with subs, he said. Having major subs — like those that install mechanical and electrical systems — on board before designs are finished eliminates uncertainty because the work is planned and on the subs' books, he said.

Wagner said between 50 and 75 percent of his company's projects have some element of early procurement.

Some of Mortenson's local projects are the $200 million-plus seawall replacement in Seattle, $90 million renovation of University of Washington Medical Center, $210 million expansion of Chambers Creek Wastewater Treatment Plant, and Touchstone's Hill7 and Hilton Garden Inn.