Skyrocketing Construction Costs Leave HOAs to Cope with Underfunded Projects
Tackling the uncertainties: best practices for bidding, budgeting, and contracting in HOA projects.
By Regan Brown and Chris Sigler, B.S.C.E., CDT
This article first appeared in The Communicator, Spring 2021. To read more, click here.
Over the past four years, skyrocketing construction costs have created various forms of havoc throughout the construction industry, to the surprise of many HOAs in need of project work. The increases have taken on various forms. In 2017-18, a strong economy and a demand for housing fueled a labor shortage, showing an overall increase of almost 30 percent in construction costs nationwide; in 2019, political tariffs and multiple natural disasters fueled the next wave of increases, this time affecting material costs.
The Pandemic’s Impact On Cost Increases
2020, the year that will go down in history for the global pandemic, brought several new factors creating price changes that we had not experienced before. When the shelter in place orders started in March of 2020, the manufacturing businesses and lumber mills closed down, affecting product manufacturing, supply, and delivery. After a short period, construction was then deemed "essential" and construction companies slowly started back up. However, while shut down, people were not spending money on dining out and travel, but instead began to buy appliances, furniture, recreational vehicles. Then came "do it yourselfers." Both Home Depot and Lowes reported record earnings in 2020. This created a shortage of material supplies not experienced in decades. All of this contributed to the run on soft lumber purchases, leaving the supply from the mills and other manufacturing behind the demand. Transportation and shipping also have added to the delay of deliveries.
All of this led to consumer spending, which increased 6.4 percent last year. But production of goods, which decreased 8.4 percent, lead to the shortages and higher prices. This is known as the bullwhip effect and is affecting material availability and costs across the country. Where a contractor once could place a window order and expect it to be two to four weeks, now that order can take as long as 12 weeks or more. Add the constraints of the safety requirements by the coronavirus and it makes the supply chains even slower. Most of the lumber mills and manufacturing plants are still not back at full capacity.
Bidding, Contracting, and Identifying the Potential Pitfalls
As construction companies began a furious bid war for survival work to get them through the pandemic, possibly taking jobs with a low profit margin, they now find themselves on the wrong side of the bid. Bids have only increased 0.1 percent, while material costs have skyrocketed. In an effort to retain any profit, they are reducing schedules and pushing crews hard, which leads to problems such as construction defect, safety issues, and alternate products that may not be as effective. We are now seeing increases in other building materials such as building paper, up 63.4 percent, and plywood products, up 35.6 percent (see chart). All of these increases could affect the underfunded projects as these costs get passed on to the associations. This could lead to legal disputes over contracts and assessments and loan requirements, especially for those who wait too long before executing their projects.
Source: U.S. Bureau of Labor Statistics-February-17-2021-comodity-groupings Table 5. Producer price indexes and percent changes for selected commodity groupings of intermediate demand by commodity type category (bls.gov)
There is now a growing concern that if these rising materials do not get under control, they will inflate the cost of infrastructure and construction projects, which could undermine our recovery from the pandemic. The concerns have now become so severe that:
"On February 18, 2021, Stephen Sandherr, CEO of the AGC (American General Contractors Association) asked President Joe Biden to urge domestic lumber producers to ramp up production to address growing shortages, as well as to make the crafting of a new softwood lumber agreement with Canada a top priority of his administration."
Best Practices to Protect the Association
To avoid disputes, price increases mid-stream of a project, or other cost-related stumbling blocks, it is recommended that a few simple, but important steps be taken to protect your association when entering into new repair and/or maintenance projects:
- Hire professional advisors to write a work scope, material specifications and set up the bidding process on behalf of the association.
- Require that the bidders provide unit costs – both labor and materials, and markups.
- Add clauses to the construction contract that will set the ground rules for potential price increases by providing contractual parameters for such increases.
- Ensure that the HOA or its construction manager creates a contingency line item in the project budget to protect both parties against price increases.
It is clear that associations need to continue to invest in ongoing maintenance to mitigate projects from becoming large replacement and reconstruction concerns, given the volatility of the labor and materials markets for construction. Whenever possible, consolidate projects (think SB326 inspections combined with stair or deck repair), and it is wise to anticipate longer than "normal" time-frames to do the work. Reach out to the HOA-based professional advisors and contractors who have earned a solid reputation and understand this specialized industry. With an atmosphere of transparency, the use of professional advisors, and good communication between all parties, these issues of price volatility and their potential disputes can be avoided from the very beginning, minimizing the negative impacts that they could have on our aging and underfunded associations.
Regan Brown is CEO of The GB Group, which provides construction services in California and Nevada to homeowner associations (HOAs), apartment, high-rise, and mid-rise communities, and select commercial projects. A respected leader in the construction industry, Brown regularly looks for opportunities to educate the HOA industry on difficult topics through speaking, writing, and an industry podcast. Chris Sigler is the president and owner of C.L. Sigler & Associates, Inc., a construction management and consulting firm that has exclusively served the HOA industry for 20 years. A civil engineer by trade, Sigler has 30 years of engineering and construction experience and is certified with the Construction Specifications Institute (CSI) as a construction documents technologist.