Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
A Burning Question
It’s only natural for contractors to worry about the possible erosion of their profit margins due to unanticipated increases in construction costs. Bids based on today’s construction costs that would yield a certain profit today can turn out to be less profitable a few weeks or months down the line if those costs increase. So, it’s understandable that contractors, from independent operators to the owners of large construction firms, are eager for any information on the direction and magnitude of likely movements in construction costs. Questions such as will construction costs go down in 2023 are on everyone’s mind.
Construction Cost Components
In putting together estimates and budgets for potential construction jobs, contractors must include both direct and indirect costs. Direct costs are the cost of labor and the cost of construction materials. Contractors have little control over these. Sure, they might be able to negotiate supplier discounts here and there. And some might try to make do with fewer workers, but that’s typically an unacceptable trade-off against time and quality. There simply isn’t much wiggle room with regard to direct costs.
Indirect costs are overhead and profit, which do provide some wiggle room. Contractors can usually find ways to reduce overhead by shopping around for cheaper insurance or renegotiating loans or leases. And they always have the option of lowering their profit expectations unless they have shareholders to satisfy.
Construction Cost Drivers
Construction labor costs are driven by supply and demand. The pandemic reduced the size of the U.S. construction labor pool, which was already shrinking due to an aging workforce and early retirements. The shortage of skilled workers reflects the declining number of young people entering the construction trades. The shutdowns and layoffs that occurred at the height of the pandemic further shrank the supply of skilled labor. When the pandemic eased, and construction starts increased in 2022, the demand for skilled labor continued to outpace the growth of the construction labor pool.
The costs of construction materials soared with the pandemic shutdowns, the higher tariffs and export taxes levied by many countries during the pandemic, and the disruption of international shipping. Lead times for procuring materials grew much longer, as ships carrying essential materials sat offshore for weeks waiting to be unloaded. Fortunately, that’s no longer the norm, and the costs of some materials are moderating, though others remain high.
Price volatility remains an issue in the construction industry, however, particularly for materials sourced from overseas. And material prices move independently. Lumber prices may be coming down while the price of concrete is going up.
Will Construction Costs Go Down in 2023?
It’s hard to know what to expect when the experts can’t seem to agree on the future movement of construction costs. Heading into 2022, the expectation was that the cost of construction materials would stabilize and begin to return to their pre-pandemic levels. But nobody counted on rampant inflation and the interest rate increases implemented to bring it under control. Many predicted recession, and some still do, even as inflation begins to ease. Add into the mix the ongoing war in Ukraine and the boost the construction industry is getting from the Infrastructure Investment and Jobs Act and it becomes very difficult to keep track of all the moving parts and how their interactions will affect construction costs.
In February 2023, most pundits believe the construction materials cost will continue to fluctuate. The consensus is that the cost of most materials will not return to pre-pandemic levels this year, though they should come down or at least not increase as dramatically as they have been.
Building Bonding Capacity
In anticipation of a more stable and favorable construction environment and billions of dollars of IIJA-funded contracts on the horizon, this is a good time for construction companies of all sizes to work on building their bonding capacity. Sole proprietors and owners of big firms should concentrate on getting their personal finances in the best possible shape and documenting their industry experience, as those are big considerations in underwriting construction surety bonds.
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