weekly feature | Jul 5, 2023 |
Inflation is going down. Why aren’t contractor bids?

In June 2022, inflation was over 9 percent; the Federal Reserve was frantically raising interest rates; and sky-is-falling pundits were forecasting $50 gallons of milk. So this past June, there was understandable cheering in Washington when the index dropped to 4 percent, the lowest in two years. Driven either by sound fiscal policy or sheer luck, inflation appears to be slowly receding.

But while economists breathe a (very) cautious sigh of relief, designers are confronting the sobering reality that building costs—especially in hot markets—continue to rise at a steady clip. Maybe the price of milk shows signs of leveling off, but contractor bids? Not so much. Across the country, the numbers keep climbing, sometimes jumping radically from the early bid to the final sign-off.

In Houston, designer Veronica Solomon put out bids for her own home and design studio in 2022. Earlier this year, she was ready to sign off—only to find that the price had increased considerably. “Pretty much everything went up from just six months ago; labor costs were crazy,” she says. “And the price of windows alone had jumped up 20 percent.”

Climbing prices are affecting the way clients make decisions too. “I had a few projects that have been in preconstruction and bidding for months,” says Sacramento, California–based designer Rebecca Plumb. “One is for a full kitchen and bath remodel, and the final bids came back so high—maybe 50 percent higher than expected—that the client decided to phase them and do just the bath for now.”

Contractors themselves are certainly noticing it. “I’ve been in construction in some form since the 1990s, and I have never seen price increases like this,” says Brad Leavitt of Scottsdale, Arizona–based contracting firm A Finer Touch Construction. “In 2006, we saw costs going up but it was short-lived. Now, after 2018, costs have been going up consistently.”

Nashville designer Stephanie Sabbe sums it up succinctly: “We moved here in 2015 and renovated our house for under $300 per square foot. Now we’re getting reno bids for $850 per square foot. Same neighborhood, same materials. These prices are literally insane.”

The continued upward pressure on building costs has flown slightly under the radar because of what came directly before—Covid’s dizzying material price spikes. There were stretches of 2021 when the price of lumber effectively doubled over the course of a month. That, coupled with more arcane shortages (remember the garage door crunch?), created a chaotic landscape where contractor bids were outdated as soon as they landed in the client’s inbox.

That drama is over. Material prices have stabilized. They have not, however, gone down. Meanwhile, contractors say it’s a new cost base that is pushing up bids at a steady clip: Labor, which, for those in the know, has always been the real driver of the cost of a project.

“People get fixated on the price of materials, but then they’re surprised to find out that, in their $200,000 kitchen reno, only $40,000 comes from materials. The rest is people,” says Steve Tankersley, the owner of Northern California–based firm Tankersley Construction. “A good carpenter earns $45 an hour, but then you add benefits and insurance and margin on top of that, and it’s costing us $1,000 a day to have them on the job site.”

Why are those—already high—costs rising? Partially, it’s the same consumer inflation that’s driving up wages nationwide. “In our industry, labor costs go up at a slower pace than material costs,” says Josh Wiener of high-end New York–based contracting firm SilverLining. “Employees are in reaction mode to last year, when they saw their gas prices, food prices and energy prices all go up. If you have a mortgage and it’s not locked in, that’s going up too. So people feel less stable in their own finances, meaning that when it comes time for a performance review, they feel like an 8 or 10 percent raise is only breaking even.”

For large contracting firms, some of which employ 50 to 100 team members, those raises stack up. Those who rely mostly on subcontracted labor feel it too, as their subs add on a margin to the raises they themselves are handing out.

But while inflation may be pushing up contractors’ labor costs in the short term, the bigger problem is a long-simmering talent shortage. According to the trade group Associated Builders and Contractors, the construction industry’s workforce shortfall stands at more than half a million employees—meaning that 500,000 new workers could enter the market and the industry would still be operating at a deficit. That shortage, say contractors, is particularly noticeable in the high-skill, specialized trades. “For every 10 people leaving their trade, there’s something like four coming in—it’s a huge problem that people don’t understand,” says Tankersley. “If you can find a great carpenter or a plumber, basically you have to pay them whatever they want.”

A shortage of talent and a demand for services means that contractors are under even more pressure to pay up for the best talent. Especially at the higher end of the market, the demand for skilled pros is so high that firms in Florida or Texas sometimes look to poach the employees of contracting firms in New York. “Now, when you lose someone, it may be that they moved across the country,” says Wiener. “You have guys who can move to Miami or Austin, get a salary bump and have a higher standard of living—and they can come back to New York if they want to.”

Even in local markets, the pressure is on. “Because there’s such a low barrier of entry to starting a construction company, if you have a guy who is a skilled plumber and people like working with him, he can just walk off the job site and start making $200,000 per year on his own,” says Tankersley. “So you have to find a way to keep that person, and it costs money.”

Fast-rising construction costs exacerbate what is likely a familiar challenge for designers. If clients walk into a project with a $1 million budget for both renovation and furnishings, and the contractor bid jumps from $600,000 to $900,000, guess what’s getting scaled back? As a general rule, clients will skimp on curtains and drawer pulls before supporting walls.

“Designers are always getting shortchanged at the end of the project—always,” says Sabbe. “There was this project where a client had copper gutters, but when it came time to buy pillows, there was nothing left in the budget. It’s like, ‘You have copper gutters but we can’t get a few pillows?’”

The problem with both sources of upward pressure on building costs—wage inflation and a talent shortage—is that neither are likely to go away in the near future. While cooling inflation on consumer goods might ease the pressure on contractors to hand out big raises every year, salaries certainly aren’t going to go down, even if gas falls below $3 a gallon.

And while the demand for skilled tradespeople will hopefully inspire the next generation to pick up hammers and enter a surprisingly lucrative field, it will take time for America’s current high school graduates to become America’s next wave of master plumbers. In other words, don’t hold your breath for building costs to take a nosedive anytime soon, especially given the stark housing shortage keeping builders busy.

“A lot of my clients were like, ‘We’re going to wait until prices settle,’” says Leavitt. “A lot of them are hoping for a 2009-like crash, but 2009 was totally different, specifically around housing. … I recently went to a builder show, and all these big home builders didn’t care about vendors holding pricing—they just wanted vendors to hold stock.”

Tankersley, who recently posted a series on Instagram titled “Right Now Is the Cheapest Time to Build in the Next Decade” that went semiviral among designers, is not holding his breath for a cheaper tomorrow. “Material costs are not dropping all of a sudden, and there is no reason why labor prices are going to decline, especially as the cost of living goes up,” he says. “That’s why I tell people: ‘Right now is cheap.’”

There isn’t a single solution for the design budget squeeze caused by rising construction costs. Some designers require clients to commit to a minimum spend when they sign a contract, which—if clients stick to it—at least ensures that firms don’t lose money on a project.

But whatever the pricing strategy, say designers and contractors alike, the best coping mechanism is simply more—and better—communication. Clients need to understand upfront that early construction bids are not fixed costs, and in the current climate, they’re not likely to go down before it’s time to start writing checks.

“I make sure clients understand that these costs are estimates, and that they can and will change once we get a firm quote,” says Solomon. “On renovation projects, I’ll put aside a percentage and keep it as a cushion, 5 to 10 percent, in case costs increase in certain areas. It’s a contingency, and if we don’t use it, then the client gets a bonus at the end of the project.”

Now is also a great time to rely on trusted partnerships with GCs, or start building relationships if you don’t have them already. The closer you are to a builder, and the earlier both of you are involved in the planning on a project, the likelier it is that both of you can walk away from the job with a profit.

“Nothing is worse than a client getting it in their head that a kitchen is going to be $100,000, then the contractor comes in and says that it’s actually $175,000—no one is going to be happy,” says Tankersley. “That’s why we love to come in early on a project and talk pricing through in a really upfront way with designers. Say we’ve designed a kitchen that’s going to cost $190,000. If you need to make $40,000 on furnishings on a kitchen remodel, great, we can figure that out and peel our budget back to $150,000. But the earlier we talk about it, the better.”

Homepage image: Generated by Midjourney

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