The construction industry is receiving somewhat mixed economic signals lately. On the good news front, the home building industry which has been mired in recession far longer than the rest of the economy is showing signs of life. Bloomberg reported that sales of new homes climbed in August to a high for the year. The news was tinged with some contrary news that pricing reflected competition from large numbers of foreclosures of existing homes in the marketplace. Bloomberg also reportedly separately that estimates of new home sales for 2010 may increase substantially as well, particularly if Congress extends the tax credit for first-time buyers.
On the other hand, reports on pricing and cost figures in the commercial and government sectors do not appear as rosy. Engineering News Record recently described (subscription only) the “sharp and prolonged decline in construction costs” in our current economy as unparalleled since the Great Depression. In particular, the article by Tim Grogan and Tom Nicholson pointed to year-to-year decreases in construction pricing of 10.8% in the Turner Construction building cost index. Karl Almstead, the vice president of Turner who is responsible for their building index, is quoted in ENR as stating:
This is the largest drop in costs for a given year that we have seen in our index since the Great Depression of the 1930s. Materials prices recently have been fairly level, and labor costs are pretty flat too. It is market conditions that are driving costs down.
In the absence of much activity in the commercial markets, many firms are flocking towards the government contracting arena. Initial reports over the summer indicated that GSA was receiving bids that were as much as 15% lower than expected on projects funded with stimulus dollars. The official GSA press release couched the level at costs 8-10% lower than expected. We are anecdotally hearing of some players bidding jobs below their actual costs simply to try to generate modest cash flow in the short term.
The availability of some increased government funding in a tight market, a highly aggressive bidding environment, and the nature of competitive government low bidding delivery methods collectively appear to create the perfect storm for claims and litigation. This environment leads to a number of conclusions:
- Unreasonably low bids translate to far more change order claims.
- Subcontractors or contractors who cannot profit based on their bids are more likely to fail
- This translates to terminations, defective workmanship, takeovers and claims
- The smart money will sit and wait rather than chase unreasonable numbers
- Our prediction is that we see a huge increase in delay claims, change order claims, and general litigation chaos over the next 2-4 years in the construction industry.
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