How do construction costs develop? And does this differ in healthcare or in education? Can we influence the costs? Our experts are happy to tell you more about it.
The whole world is talking about it:
The coronavirus. What are the consequences and will this lead us to a crisis? The consequences quickly become visible in construction. Because factories in China are down, deliveries are at risk. Products are not delivered or delivered late and if you want to have it quickly, they must be bought elsewhere. With a smaller supply and constant demand, prices will rise. In the installations, in particular, many (semi) manufacturers and parts come from China, where the consequences will be greatest. For some products, we are (almost) only dependent on China. Elevator parts and especially escalators are only produced in China. Deliveries are stalled and prices are expected to rise and products to come too late. This can already have consequences for current projects, where the schedule is not met. It can also have consequences for upcoming projects. After all, when production starts up again, the backlog must first be cleared and manufacturers have a high demand.
The market
Although in the second half of last year it looked as if the work stock in both residential and non-residential construction would no longer increase, according to the EIB there still appears to be a slight increase. So despite the nitrogen crisis, the work stock is still increasing.
Of course, permits had already been issued for many projects and these projects are continuing, and it appears that there is still a shortage of skilled personnel. This shortage is decreasing at various companies, but the projects that are ready cannot always be tackled immediately. It is striking that the pressure on suppliers is decreasing. Where a year ago contractors did not know how quickly they had to register a supplier in order to be sure of on-time delivery, they are still waiting a while. If demand decreases, there may still be purchasing benefits.
The scarcity of personnel has an influence on prices, both for construction companies and for subcontractors. On the other hand, wage costs fell slightly as of January due to a change in premiums to be paid. A slow decline in the rise in construction costs can be seen.
The largest increase is caused by an increase in General Construction Site costs and also in General Costs and Profit & Risk. This increase continues and is seen in all sectors, not only in non-residential construction but also in residential construction and civil engineering projects. If the competition for registrations is higher, the surcharges used may be lower again.
Part of the increase in direct costs is therefore cyclical and part is structural.
Business cycle
We are still in a boom, but we are over the top. The cyclical rise is slowing down again. The price level is higher than before the crisis. BDB’s prediction is that the cyclical index will be approximately 1% at the end of the next year (so at the end of 2021). Now that index is 7.5% and at the end of last year, it was the highest (7.7%).
The figure below (the green line) shows the price increase compared to 4 quarters before. We see that the peak was in 2018 when the price increase (the combination of structural and cyclical) was 10% in one year. At the beginning of 2020, prices will be approximately 2% above the prices at the beginning of 2019. At the end of this year, this will fall further.
We are still well over 6% above the “neutral” line of structural price increases.
BENG
BENG (Nearly energy-neutral building) has been postponed again. This was due to start July 1, 2020, but it will now be January 1, 2021. As we had mentioned in an earlier article, the construction and investment costs due to NZEB will increase by 3-7%. For healthcare and education buildings, the increase will be at the top of this range (5-7%) and for commercial and office buildings at the bottom (3-5%). This increase comes on top of the aforementioned structural and cyclical increases. If budgets are now set for new construction projects for which the building application (environmental permit) is applied for after 1 January 2021, this must be taken into account in the budgeting.
Disappointing tender?
At the moment, it regularly happens that the lowest tender sum is well above budget in a tender. What can you do as a client? One thing is certain: if money is not simply added, it will take time.
You can talk to the registering parties; this is also allowed in a European tender, but you must talk to all parties. In the event of a material change, all parties must be able to make an adjusted offer.
Subjects that may then be discussed include:
- Have risks been placed with the contractor that does not belong there or where the chance of occurrence is almost 100%? These are discounted in the budget.
- Have quality requirements been included intentionally or unintentionally? The specifications may unintentionally contain a text that does cost a lot of money, or the client generally sets a high requirement that is not immediately required in the present project.
- Are modifications possible that do not affect functionality? These can be aesthetic aspects, but also a (too) high luxury in choice of materials and alternative manufactures. Sustainability requirements can also fall under this, but letting them lapse may conflict with the objectives of the organization.
- Are changes possible that result in a limited but acceptable decrease in functionality? Think of a large degree of flexibility, possible expandability of the building, multi-functionality of spaces.
Our experience in these discussions is that what leads to savings for one tenderer, yields considerably less for another tenderer. Contractors have different views. It is therefore good to learn from all parties what is possible.
The client must also determine what he wishes to receive upon delivery. Often the most detailed information and the most extensive processing in BIM are requested. These are real costs and if you as a client do not have a plan for this, it is wise to reconsider this question. These costs are included in the AUK, just like the risks. It is certainly important to take a critical look at this.