How Basic Costs Affect the Construction Industry – An Analysis

It’s a fact that most industries in the past decades have been suffering from the effects of inflation and never-ending rise of production costs. The construction and engineering industry has not been spared the dilemma. Aside from dealing with shortage in labor and manpower, material costs are also taking a toll on the productivity of the construction industry.

The worker shortage

Fewer employees might translate to more profit for some industries, but this is not the case for the construction industry. According to James R. Bogonet of Bogonet Construction Associates Inc., a D.C. firm that specializes in building and renovating interior office space:

“I’ve had to go out and work weekends to keep a project on schedule. The construction industry is suffering a severe worker shortage that is helping drive up the cost of development, including wages and office rental rates.”

The trend is continuous, because as early as year 2000 more than 240,000 jobs related to the construction industry are glossed over for higher-paying jobs. It’s a case of double jeopardy- if the firms do not pay enough, they don’t get staffed. But they lose immense profit when they do pay higher salaries to construction workers. The problem is cyclical.

Prices are going up, up, up…

According to Engineering News-Record, an industry publication: “National construction costs are up 2.3 percent this year.”

The problem calls for more capital outlay on the part of the clients, because to handle for the backlog due to shortage of workers and even tighter deadlines because of being understaffed, it takes $125-$150 to construct a single square foot of office space in the prime areas of United States.

This figure exponentially rises when we’re talking about the largest buildings and skyscrapers that are either leased or rented out to individual office-space holders.

Subcontractors decline

Smaller outfits are being more selective because of the relative shortage of manpower in the construction business. According to David Dempsey, a senior vice president for Spaulding & Slye Colliers, a development and construction group in the District:

“Ten years ago, if you put out a bid for masonry work, you might get twenty some responses. Today, you’re lucky if you get six.”

As we can see here, the construction industry is experiencing a very tight labor market. In the event that such labor conditions exists, every cost rises to match the unceasing demand. On the other hand, when labor is plenty, the prices drop because of the distributive quality of supply and demand scales.

According to Andrew Craig, vice president of construction and design for Staubach Co., an international commercial real estate brokerage:

“There is so much demand for development in this area that the problem takes on more urgency. We have to be more strategic, more nimble. They (the clients) want to know, `Why am I paying $50,000 for something I paid $30,000 for last year?’ You have to help them understand what’s happening in the marketplace.”

Craig’s analysis is quite dynamic because it highlights a basic truth about all industries- that in the end, if the market is sluggish, everything topples to the ground.

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