Planning for Construction Cost Inflation

Construction cost inflation is a reality everyone is trying to manage. The year-over-year inflation that occurred in 2021-22 has slowed slightly in recent months, but elevated inflation is an issue school planners must account for.

History

To document cost trends, the construction industry compiles data on material and labor costs. National publications, cost data entities, and construction firms generate cost indices for tracking inflation. From data prior to 2021, U.S. historical annual construction cost inflation has averaged 3% to 4% for 10-plus years. Historically, the design and construction industry has used those reliable ranges in forecasting costs.

Forecasting Example

As an example of cost forecasting, a school district in metropolitan Minneapolis received bids October 2015 to construct a high school. Dividing the “bid” amount by building square feet results in a cost per square foot (e.g., $26,000,000 / 130,000 sq. ft.) of $200. Now, fast-forward to August 2017 – another Minneapolis-area district seek bids for a similar school. With 7.34% construction inflation over the two-year period (about 3.6% per year), the bid for August 2017 would be revised to $214.68/sq. ft. Forecasting out to an August 2019 bid, apply 4% annual inflation to arrive at $232.20/sq. ft.

Future inflation is an unknown, but historical numbers have provided estimates with relative accuracy. That wasn’t the case in 2021 and 2022; the construction industry experienced extreme year-over-year inflation. If districts sought high school construction bids in 2022 using the historical inflation percentages cited above, bids would have exceeded estimates by a double-digit percentage. Many school districts have experienced this scenario.

2021-2024  

The years 2021 and 2022 are anomalies – in most U.S. cities, annual construction inflation rate exceeded 10% for months. For example, the Engineering News Record Index lists the Minneapolis metro area annual inflation for 2022 at 12.4% through October. During March through May, contractors were receiving weekly price increases. The month-to-month inflation during that time exceeded 1%, which made it especially difficult to estimate costs in the design phase. Recently, the annual construction inflation rate in Minneapolis for August through November 2022 has dropped to between 7% and 9%. Going forward, forecasting inflation for construction costs in 2023 and 2024 will continue to be challenging.

Strategies for the Future

For school districts, a large construction project typically goes through many stages: district-wide facilities planning, community engagement, bond referendum passage, design/construction documents preparation, and contractor bidding. These activities can easily take several years. An estimator frequently must forecast project costs two to three years into the future.

To deal with higher inflation, potential cost fluctuations, longer delivery lead times, and labor shortages, design and construction professionals must devise strategies to manage these conditions. Strategies include: 1) using higher inflation percentages in forecasting; 2) modifying designs and systems to accommodate market conditions; 3) introducing alternate materials and methods into projects to address cost fluctuations; 4) obtaining separate bids on selected “big-ticket” components; 5) requesting options for extending completion dates.

Planners may choose to incorporate a higher annual inflation instead of historical 4% annual inflation when calculating cost estimates. They may seek to incorporate systems and products that are readily available and resistant to inflation. They should help school clients evaluate needs versus wants so they can seek more affordable base bids with alternates as add-ons. They also can propose bid alternates for extending completion dates (e.g., considering long-lead orders and unforeseen shipping delays).

With higher construction cost inflation, it is essential that strategic planning, effective management, and accurate cost forecasting be in place to get school projects designed and built.

Paul W. Erickson, AIA/NCARB/REFP, executive officer & partner, is past president of ATSR Planners/Architects/Engineers. He has 45 years of experience in school planning, design, and construction. Erickson can be reached at [email protected].