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How Do You Manage Project Costs in Expensive Markets?

By Kevin Wilcox

New report highlights the factors driving the world's most expensive construction markets; expert offers advice on controlling costs.

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New York City is by far the most expensive construction market, according to a new report. Wikimedia Commons/Artico2

May 9, 2017—When it comes to construction projects in New York City, if you can build it there, you can build it anywhere else for less money. The Big Apple remains the most expensive construction market in the world, according a new report issued by the international design firm and consultancy Arcadis.

New York City is by far the most expensive construction market, followed by Hong Kong, Geneva, and central London. The report, International Construction Costs 2017, notes that international investors are driving a real estate building boom in the New York area that has resulted in a local labor shortage and rising costs in an already difficult market.

"The logistics of constructing a major project there are really difficult," says David Hudd, a principal and cost consultancy expert at Arcadis. "You're working in a very overheated environment. There is a lot of construction activity going on there. The logistics of moving materials around the city, if you're trying to build something in Manhattan, is very difficult. And it's hard to resource your contractors with local labor."

As more owners choose a design/build project delivery method for their buildings, the cost of construction has had a more direct effect on engineering firms, architects, and contractors. When a project has a single budget number, projected increases in construction costs often lead to substitutions and even redesign work.

The status of Hong Kong as the second most expensive city in part derives from its connections to the larger Chinese market. Large projects in the city sent construction to record levels in 2015, and that created a labor shortage of an estimated 10,000 workers in the industry, driving costs higher and delaying some projects, according to the report.

The good news is that Hudd sees some cooling in the overall Asian construction market in the coming years. "China has been having a great deal of influence on the world market, and I think that is slowing a bit now, which is probably a good thing," he says.

Of the 10 most expensive construction markets, 6 are in Europe: central London; København (Copenhagen), Denmark; Stockholm, Sweden; Frankfurt, Germany; Paris; and Wien (Vienna), Austria. Projections for modest building growth in much of Europe point to a stable balance of demand and workload over the next few years, Hudd says. But the United Kingdom's withdrawal from the European Union, or "Brexit," adds a level of uncertainty to the market, especially in London.

Although labor costs come immediately to mind when considering construction costs, the report notes that the prices of such commodities as oil and copper can have a pronounced effect on local markets and even on global ones. As Hudd explains, the price of oil affects everything from the cost to manufacture building supplies to the cost to ship supplies to the site, and it even has a bearing on the cost of placing the supplies on-site via crane.

Another good example is copper. "Think about how much copper goes into a building," Hudd says. "Copper is part of all the electrical systems in every building. You can have some fairly significant swings in the price of copper." Those swings then show up in the bids from electrical contractors.

For engineering firms that need to manage construction costs in such expensive cities, especially when they are involved in either a design/build or a construction management contract, it's important first to develop a thorough understanding of the owner's expectations for the project and then to "think carefully about [each] element of cost estimation," Hudd says.

It is not enough, he adds, merely to project a 2 to 3 percent annual increase and move forward. Rather, those forecasts need to be revisited several times during the design phase to make sure they are in alignment with the actual market.

In high-cost construction markets where prices are rising, Hudd says, breaking up a project into parcels so that some of the work can begin earlier can help reduce costs. Likewise, procuring materials or entering into price agreements with vendors early in the project can be a hedge against commodity price increases.

"If you have a design/build project where the whole thing is melded into one number, it puts a lot of pressure on the design/builder to contain the costs to meet the budget," Hudd says. "If you have not forecasted construction cost increases very thoughtfully, any contingencies you do have on the project can be quickly eroded—and not for the things you have the contingencies for in the first place."


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