COSTS ARE MOVING ON UP
In his 37 years in construction, Joe Hughes, owner of Portland-based Joseph Hughes Construction, has lived — and worked — through more than a few boom cycles in the industry.
The current one, he says, is a lot like previous ones, with one big exception. As the Portland metro area has climbed out of the Great Recession and the pace of construction has amped up, problems associated with shortages of prime land, skilled workers and close-in areas to dump rocks and soil and demolition debris have created challenges for contractors and their subcontractors looking to keep projects on track.
But the addition of the Trump administration's tariffs on building materials coming into the U.S. from Canada, Mexico, China and the EU has added a new pressure to the mix.
"If it was just a busy market, the price (of materials) would nudge up but still be kind of predictable," Hughes said. "But with tariffs, you don't know what they're going to be moment to moment."
In the past few weeks, one highly touted project — the mass-timber building called Framework — has been shelved for now due in part to escalating construction costs. Another — Portland State University's 4th and Montgomery project — has been scaled back in size, also because of increasing construction costs. Even renovation projects aren't immune to the impact of rising costs.
"It's a crazy time out there," Jake Sly, business development director for R&H Construction, said. "It's a real challenge for everyone, whether they're participating in a new construction project or a renovation."
Before the tariffs on building materials went into effect, price quotes for products such as raw steel and lumber could be counted on to be good for 30, 60 or even 90 days, according to Hughes. Those times are now a thing of the past.
"There is a joke out there that suppliers will hold the price until the phone call is over," Hughes said.
For steel fabricators like Ronda Cross, that joke hasn't been far from the truth.
Immediately after tariffs on raw steel imports went into effect, Cross saw prices for the material climb, increasing by as much as 25 percent. The prices were so uncertain, she said, that most vendors wouldn't guarantee price quotes for more than 24 hours.
Cross, however, was prepared for that impact. Even before the tariffs were a reality, she was taking a cautious approach when building bids for projects. Her steel fabrication and erection company, Big C Industries, is based in Washington state, but most of its projects are in Oregon.
She had experienced rapid, steep increases in steel prices in the early 1990s, during an economic downturn when she was first getting into the industry. She learned from that time the importance of keeping in touch with her vendors to track their predictions for the market. Those close relationships paid off this time around.
"We keep a pretty tight line with our vendors, and they kept us informed (when they thought prices were going to start increasing)," Cross said.
With that information, she was able to estimate how to bid for projects in November that her crew wouldn't be working on until the early spring, when tariffs might be impacting prices. While she didn't win all of those projects because her bids were sometimes higher than competitors who didn't take the possibility of tariffs into consideration, she also didn't end up scrambling — or losing money — on the contracts she was awarded.
The volatility of steel prices has appeared to calm, Cross says. But the costs are still quite high, and that's a reality Cross and others are learning to live with.
"There was quite a bit of escalation, and they won't be going back down," she said.
Tariffs aren't the only factor putting pressure on what has been, until recently, a market in which the biggest challenge for contactors was which projects to submit bids for.
The skilled labor shortages that trade groups were warning about before the recession have come home to roost, as workers laid off during the economic downturn failed to return to the industry once the economy began ramping up again. The recent retirements of the first waves of baby boomers have exacerbated the shortage.
Pulling workers from other parts of the state isn't an option to solve the shortfall. Construction workers in Salem don't want to come to the Portland metro area because they don't want to deal with the traffic tangles.
Similarly, it's hard to woo Portland-area workers to Salem, also because of traffic congestion. Even the lure of working on a high-profile project like a fulfillment center for Amazon wasn't enough to convince construction crews to make the trek to the state capital, Lauren Golden Jones of Capstone Partners told the audience during a July panel discussion hosted by the Portland chapter of Commercial Real Estate Women. In the end, the project team had to tap talent in Corvallis and Albany to build the project.
Worker shortages affecting projects aren't limited to construction companies looking to fill positions.
Understaffed city of Portland departments, including the Bureau of Development Services, continue to cause a slowdown in the process of obtaining permits. Those delays often end up stretching out the planned timelines for projects, which can add to construction costs.
Obtaining permits outside Portland, meanwhile, tends to be less of a problem when it comes to keeping projects on track. Permitting for the fulfillment center for Amazon in Salem, for example, was a nine-day turnaround, Golden Jones said. Helping make the process go more smoothly was the fact that the city reached out to the project developer and team, suggesting they all sit down and talk about the project before designs were officially submitted.
Vancouver's timeline for issuing permits appears to fall somewhere in between Portland and Salem, with permits for tenant improvements averaging six to eight weeks, according to Greg McGreevy, executive vice president and COO for Hurley Development. Permits for ground-up construction are averaging eight to 12 weeks.
A matter of trust
While developers, project owners and contractors are being affected by current conditions, subcontractors especially are feeling the squeeze.
"In order to ramp up to meet the demand for construction, a lot have capitalized and expanded their shops," Jake Sly, business development manager for R&H Construction, said. "They've bought more equipment and their overhead has increased to meet demand."
At the same time, in order to keep up with the workload, many subcontractors have had to find new workers quickly in a market that's become thin on experience. The result is often crews that need on-the-job training, which requires subcontractors to provide more oversight. That can cause slowdowns in productivity.
"That ripples through to contractors," Sly said. "We're seeing durations longer than years ago; it's taking longer to complete projects overall. That requires more diligent management on our part to make sure everything is organized and lined up."
Part of that diligence in management is making sure subcontractors are kept in the loop when it comes to the status of projects. Doing so can create a level of trust that can help encourage a time- and crew-strapped subcontractor to keep a project moving forward.
"Subs want to know what's driving things," Sly said. "The more they feel like a partner, the better they can provide service and value."
Creating trust also extends to project owners and developers. That trust is especially critical when it comes to making sure contingencies set in place before a project begins are protected as the project moves toward completion.
A contingency is an amount of money that's set aside to cover any possible changes that occur as a project is being planned, designed and built. A well-supported project has separate contingences for escalations such as material prices increasing unexpectedly, increased costs during design phases and cost-overruns that might occur during construction.
In the past, a project team could play a little loose when it came to dipping into one pot to cover if another ran dry. But these days, with the volatility of materials prices and other factors, there's almost no wiggle room. Making sure all members of a project team — from the owner to the designers to subcontractors — understand the importance of protecting those contingencies is critical, according to Sly.
"It has to be in the equation so that ... everyone can understand the actual cost," he said. "That really has to be taken seriously."
That strategy helped R&H when the company was working on Redfox Commons, a project on the edge of Portland's northwest industrial area that turned two World War II-era warehouses into 60,000 square feet of flex office space. In preparing to build the project, R&H identified what Sly calls "big numbers" to cover the possible escalation of prices as well as changes that might occur during design and construction. The owner was fully informed as to why those pots of money had to be as large as they were. With the owner's trust, the project moved forward on time and under budget.
"We were able to go out for competitive bid and bring it in under budget because we allowed for escalation, we allowed for design," Sly said. "We were able to hold to that line. That's how it's supposed to work."
Despite all of the challenges, the pressure contractors and subcontractors are under is creating an unexpected benefit for the industry, according to Sly. Teams are finding that opening up lines of communication and employing a more collaborative approach increase the chances of a project being completed on time and on, or even under, budget.
"I think people are realizing that the adversarial model — people yelling at each other — doesn't work anymore," Sly said. "We're seeing norms and how people act with each other change.
"Everyone wants the same thing. We just have to work together to figure out how to deliver it."