Is There a Solution to the Financial Volatility in the Marketplace?

As the economy strengthens after the shutdowns driven by the COVID-19 pandemic, building owners and developers are ready to move forward with critical projects. However, with this significant uptick in activity comes a great deal of trepidation around moving projects forward. Uncertainty in the trajectory of the recovery, pricing volatility and construction cost increases are causing tremendous uncertainty regarding budgets.

As pent-up demand for new facilities pressures the design and construction industry, building owners, architects and the MEP marketplace are watching the volatile changes in construction material and labor prices with a cautious eye. According to the Associated General Contractors of America (AGC), the producer price index’s measurement of the selling price for goods used in construction jumped 3.5% from February 2021 to March 2021 and 12.9% from March 2020 to March 2021. Both of these increases were the highest recorded in the 35-year history of the index.

“Contractors are experiencing unprecedented intensity and range of cost increases, supply chain disruptions, and worker shortages that have kept firms from increasing their workforces,” noted Ken Simonson, chief economist with AGC.

Pandemic-driven shutdowns have wreaked havoc on supply chains and the MEP marketplace, but that disruption has been exacerbated by tariffs and quotas on key raw materials such as lumber, copper, steel, and even PVC. Price spikes, supply shortages, and delivery delays have become increasingly common, and the AGC cautions that these higher costs may well remain a long-term problem. The association’s Construction Inflation Alert indicates that the current conditions and the unprecedented intensity of escalating material costs suggest that a “mismatch” between material costs and contractors’ prices is likely to prove challenging to building owners for quite some time.

This situation has perhaps been aggravated by the fact that many building owners and developers have long accepted cost uncertainty within their projects. Cost overruns have been a construction norm, with only a third of projects coming within 10% of the budget in years past. This recognized norm coupled with the runaway costs building owners are facing today, it’s no wonder that so many building owners are concerned.

There is, however, good news here. Because designers and engineers have so long struggled to control cost overruns, there are solutions already in place today that can help rein in budget creep even in a volatile pricing environment.

Reduce wasteful design

While your engineering partners in the MEP marketplace may have no control over the price of materials or labor, they can make a tremendous impact in how much material and labor are used in your project. Too often, MEP engineers tend to err on the side of overdesign or overengineering a project. In some cases, an engineer may be seeking to mitigate their own risk by overengineering a system. In other cases, they simply do not have the necessary tools to do the design accurately—or to demonstrate confidently that how they’ve designed a system is exactly what is needed to meet code and system performance requirements, without including unnecessary capacity or excess materials. For example, not applying the appropriate diversity factors to the system loads can result in overdesigned portions of your mechanical or electrical system, while misguided or overly simplified calculations can lead to oversized piping. Suboptimal routing decisions compound this waste by not finding the most efficient way to connect the systems. This propensity to be overly cautious in design can be very costly: More materials and labor mean more money.

Today, leading edge engineering firms are able to apply artificial intelligence (AI) driven software solutions to support accurate calculations for these critical systems and identify the optimal layout for a building’s MEP systems. Shorter, more direct runs, coupled with precise calculation methods, require less material, less labor and less time wasted on installation and coordination. They also result in more efficient operation of the systems over the lifetime of the facility.

Reorient value engineering

Most participants within the MEP marketplace associate the concept of value engineering with what happens after a project exceeds its budget. It’s usually about the cost-cutting measures that take place after a design has already gone to bid and sabotaged the budget. In other words: Traditional value engineering is about how to fix a problem after the project is already in trouble.

So, how about flipping that conventional approach to prioritize value engineering at the very beginning of the project instead of at the end? By building in value-based design at the beginning of the project, and rethinking how to approach specific parts of the project, engineers can reduce the risk of wasting materials, time and money. By prioritizing efficient design upfront and engineering out potential waste, a project doesn’t have to reach the point of having to make cuts during construction. It is all about applying Lean engineering design principles at the start of the project when they can have the greatest impact.

Using today’s cutting-edge design technology, there’s no need to maintain the conventional approach to value engineering. Advanced modeling software and AI-driven design tools can help design and engineering partners optimize system layouts, balancing a wide range of project objectives, before a project moves into bidding and construction. Better still, as engineers offload many of the necessary calculations to technology, there’s more time to prioritize aesthetics and other project objectives to get a stronger sense of what’s important to the owner and what waste can be cut out.

Lock in subcontractors early

AGC notes that many contractors have been hurt by the fact that fixed priced bids locked in previously are now proving unrealistically low based on current material and labor costs.

While there’s much speculation today about when pricing will return to “normal,” if ever, there’s a strong chance that escalation clauses will become a more consistent part of contracts in the MEP marketplace going forward. Locking in a design partner and subcontractor bids earlier can help owners stay ahead of cost escalations in the market. This requires quicker design completion and earlier bidding of projects to stay ahead of inflationary forces.

Take control of your project budget

The reality of today’s price uncertainty is that building owners and developers can expect some difficult conversations regarding budgets. However, this is why it is more important than ever to take decisive action to reduce design waste, excess materials and installation labor. Today’s technology allows for more control and greater insight, earlier than ever, into construction cost containment. By working with a design partner who places the same emphasis you do on developing a project that meets all critical criteria, including budget, and has the design technology to back up these values, you can be confident that your project will be completed at the best possible price.

If you’re ready to rethink the value you get from your engineering partner, contact Schnackel Engineers today.