AT THE PROJECT LEVEL

How much today?

Answering this question is as difficult as it has ever been because month-to-month pricing is changing dramatically. A project that was procured even six months ago is considerably different than a new project today. Trade partner relationships and early design engagement are vital. Not only do our trade partners have their finger on the pulse of prices today, but accuracy and speed to market depend on designers, contractors, and trade partners all being in alignment. For this reason, Sam has created a national healthcare dashboard for our preconstruction teams, design partners, and clients with every healthcare project’s entire scope priced in today’s market (JE Dunn’s Lens Aim tool) – regardless of their level of design – to ensure our data is always live with today’s costs.

How much tomorrow?

The truth is no one has a crystal ball to foresee the future. Current trends have increased construction costs at a scale of 1%+ per month, which is the rate we have been advising our clients to expect for additional funding as we chart construction costs over the project’s life cycle. This rate is historically high as ANNUAL escalation over the previous 10 years was a steady 2-3% per YEAR. We have seen time after time that “hoping” for better pricing is simply not happening, so formally reconciling funding with the current economic environment is the reality and should be supported with an appropriate contingency strategy.

So what do we need to do?

The short answer—do not wait. Waiting for an economic pause or redesigning an over-budget project to reduce costs is not realistic right now. The cost of time and the escalation exposure it will cause will outweigh the benefits of any potential incremental savings. In addition, the traditional time period for value analysis isn’t worth the escalation experienced in the time it takes to do the exercise.

We are advising clients to scale back original program baseline requirements to the bare bones of the project’s initial business case. Eliminate the “would-be-nice-to-have” items and stick to the basic fundamental needs. This sets a feasible baseline project scope for the funding discussion where we can apply the “how much today” starting point.

“How much tomorrow” is a team decision on how to handle and mitigate escalation risk. We have clients using different funding levers, such as additional board requests or specific allocation of project contingencies, to fund a total project escalation contingency with the goal of maintaining that minimum baseline project scope.

From there, owners can employ a contingency strategy accounting for basic project needs and allowing additional “would-be-nice-to-have” items on a priority basis. This creates a shopping cart-like strategy where your staples are covered in the baseline, and the flexibility you have for additional items is based on how much funding you have above that baseline. The team must maintain this delineation in the project financials during the design phase. It is then up to the owner/designer and construction team to maintain flexible design options, provide live pricing feedback on the shopping cart and add/reject scope additions at the appropriate time so as not to slow down the project’s design and delivery—all while maintaining a close eye on the escalation contingency versus outstanding risk.

AT THE REGIONAL LEVEL

These project-level determinations are also impacted by what else is going on in your region. We are seeing megaprojects in towns such as Austin or Phoenix with 1M+ sf projects creating trade-specific strains in the trade partner community. This can affect your project in some scopes in certain hot markets. We maintain schedules of all large projects – not just ours – going on in each of our markets so we can get out in front of labor shortages and concentrated escalation by securing trade partners and vendors with early bid packages, bulk material purchasing strategies and regional prefabrication facilities. Employing these strategies will ensure you are as prepared as possible for the current market challenges.