Labor, Materials & Less Competition Driving Construction Costs

Originally published by: Wall Street JournalFebruary 10, 2015

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With the commercial real estate market in recovery in many parts of the U.S., construction costs are rising.

The latest sign: a rise in an index on construction costs compiled by Minneapolis-based M.A. Mortenson Co., a construction company with about $2.5 billion in 2014 revenue. The index, which started at 100 in the first quarter of 2009, hit 111 in the fourth quarter of 2014.

“In most markets, we’re advising customers to budget 5% to 6% increases in construction costs on an annual basis,” said Greg Clark, vice president of estimating for Mortenson.

Costs still aren’t rising as fast as they were just before the bust. In 2006 and 2007, Mortenson was advising customers to budget 5% to 7% cost increases, Mr. Clark said.

“But we could be at 2006-07 numbers by the end of this year,” he added.

The current rise in costs is only partly due to rises in labor and material expenses. Most materials costs—except glass—have only seen moderate price increases. Labor costs have been increasing at 2.5% to 3.5% per year, Mr. Clark said.

So why are overall costs rising faster than that? The answer has a lot to do with the numerous contractors that went bust during the downturn.

Those that were left standing are now able to charge more because competition is less, Mr. Clark said. “If there are only four people to do the work and two are busy, the two that are left are going to ask a higher cost to do the work,” he said.

Mortenson has been doing the construction cost index since 2009 by tracking costs on a quarterly in six major markets: Minneapolis, Milwaukee, Chicago, Denver, Seattle and Phoenix.

The broad index declined from 100 in the first quarter of 2009 to 94 in the fourth quarter of that year. Since then, it has been steadily rising.

Mortenson is working on a numerous high profile projects including a new stadium for the Minnesota Vikings in Minneapolis.

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