Developers, contractors struggle to meet construction schedules and avoid cost overruns
By Bendix Anderson
Since 2010, labor shortages have delayed all eight of the communities developed by Houston-based PinPoint Senior Living.
PinPoint’s large assisted living and memory care projects have taken between one and six months longer to complete than expected — largely because PinPoint’s contractors have been unable to find the workers they need to stay on schedule. What would normally be a 12-month construction schedule can now take as long as 18 months.
“The biggest concern for contractors is the availability of qualified labor,” says Ken Simonson, chief economist for the Associated General Contractors of America.
As developers rush to complete new seniors housing projects, their contractors struggle to find enough workers, sometimes creating chaos in the construction schedule. Contractors, and the subcontractors they hire, demand more for their services and may skimp on the size of the work crews they provide. That creates delays that can add to the cost of seniors housing projects.
Lower prices for commodities like diesel fuel are rarely enough to make up the difference, since those savings often don’t filter down to the project’s bottom line.
Where did the workers all go?
The Great Recession and the long, slow recovery badly hurt the construction business, which is struggling to find the skilled workers it needs now that developers are once again busy.
The construction business shed 2.3 million jobs from 2006 to 2011, or about 30 percent of the workforce, according to the Bureau of Labor Statistics. Some were drawn to jobs in other industries. Some immigrant workers returned to their home countries. Some older workers simply retired.
“The ‘no hiring’ sign was out for a long time,” says Simonson.
The job losses in the construction business started a year before employment began shrinking in the rest of the U.S. economy, and the recovery for construction also began a year later than the recovery in the rest of the economy.
The long recession also hurt the ability of employers to train new workers. “Technical education programs and apprenticeship programs shrank or shut down completely,” says Simonson.
So far, the construction business has added back about 1.2 million jobs, or a little more than half the jobs it lost.
But many construction workers who were idled at one time are no longer waiting by the phone for their old employers to call. The number of unemployed workers who last worked in construction and were looking for work in February was the lowest it has ever been since the officials began counting 17 years ago, according to the Bureau of Labor Statistics.
The lean years for the construction business also culled the number of subcontractors that can bid to build seniors housing properties.
“We invite seven subcontractors to bid and get three or four responses,” says Jason Gabrick, a division manager for Ryan Cos., a contractor based in Minneapolis. “Three or four years ago we would invite three or four subcontractors and maybe get seven responses.”
Part of the challenge is that many subcontractors may no longer be available to hire.
“A lot of subcontractors went out of business,” says Henry Hill, president and CEO of Lenox Hill Construction, based in New Lenox, Ill. For example, in the Chicago market the number of suppliers of pre-cast concrete available to bid on any project has fallen from a range of five to seven firms to now just one or two.
“Add a little bit of growth, and suddenly the few players that are active are very busy,” says Hill.
Once all the subcontractors have signed on to construct a building, the shortage of workers can hurt. Subcontractors often have difficulty finding enough workers to round out their crews.
“What used to be a 15-man electrical team is now often 10 people,” says Marc Padgett, president and CEO of Summit Contracting based in Jacksonville, Fla.
Lack of workers slows construction
Smaller work crews often take a longer time to finish jobs. That can lead to delays that create big cost overruns, ranging from more interest charged on the project’s construction financing to extra labor costs as one crew stands around, waiting for another crew to finish.
“We are building a lot more into our contingency,” says Charles Turner, president of PinPoint.
Historically, the developer added about 4 percent to its development budget to cover unexpected costs. In the past, that was usually more than enough to cover the cost of the occasional change order.
More recently, and as construction delays have added costs, PinPoint has also built some extra slack into a variety of budget lines. “So our real contingency reserve is closer to six percent,” says Turner.
Even the loss of one skilled worker can make the difference. Work on one PinPoint community was running nearly a half-year ahead of schedule when the contractor moved the project’s highly prized superintendent to another project, replacing him with a much less skilled person.
“Work ground to a halt,” says Turner. The project eventually finished a full month late. That’s because the new superintendent lacked the experience and management skills needed to motivate the subcontractors and keep the project on schedule, according to Turner. “The subcontractors wouldn’t show up or wouldn’t staff appropriately.”
Delays often start to emerge about five to seven months into the construction process — about the time workers begin putting up drywall. “If you have delays, that’s where it’s going to start showing up,” says Turner.
If a developer is having some difficulty finding the workers to complete this middle phase, even larger delays are likely to erupt as specialized subcontractors finish out the apartment units.
It is a complicated dance as drywallers, electricians and other trades work together. If one crew takes too much time, the other crews often have to readjust their schedules.
“The shortage of labor puts tremendous pressure on the schedule and the price of construction,” says Gabrick
Best advice: start early
Developers and contractors are striving to keep their projects on schedule by increasingly signing up subcontractors early in the process.
“We like to hit the market right away as soon as the project becomes a reality,” says Ryan’s Gabrick. “We like to get that subcontractor on board as soon as possible, maybe even before a bid, on a fee basis.” The goal is to avoid having to scramble later to find subcontractors.
Additionally, as architects and developers finalize their building plans, they might benefit from the local knowledge that contractors and subcontractors often have of the building codes and regulations in markets where they work, according to Gabrick.
“Get that contractor involved early,” says Gabrick. “Build relationships to eliminate surprises.”
Relationships also help Summit Contracting handle the labor shortage. “We have a handful of subs that we have used for years,” says Padgett. Some of these relationships are exclusive. “Our framer only works for us. He doesn’t spread himself too thin.” (Framers erect the support structure of wood frame buildings.)
It also pays to treat employees well. The Jacksonville Business Journal has named Summit Contracting the “Best Place to Work in Northeast Florida” two years in a row based on employee surveys.
Contractors also carefully write their contracts with their subs to provide the proper incentives.
“We are writing construction contracts with timeframes and penalties and bonuses,” says Joe McElwee, head of development for Capitol Senior Housing. “We really want to make sure the subcontractors are there.”
These strategies are already working for Capitol Senior Housing on one of its first developments, Welbrook Senior Living in Torrance, Calif. The firm broke ground on a new phase at the assisted living and memory care property in May 2015 and is now nearly finished.
“California is a very busy market and we are ahead of schedule,” says McElwee.
Materials prices rarely fall
On the international markets, prices are falling for many construction materials. Outside the United States, a slower worldwide economy has pushed down the prices of commodities such as oil, metals and concrete.
But these lower commodity prices don’t always filter down to the prices that suppliers and subcontractors charge to supply materials to seniors housing construction projects.
“We were hoping the price of materials would come down — it never comes down,” says a disappointed Turner of PinPoint.
The producer price index (PPI) of inputs to multifamily residential construction, goods less foods and energy, inched downward 0.2 percent over the 12 months that ended February 2016, according to the Bureau of Labor Statistics.
Materials suppliers and contractors may not always pass along the slight savings, however. “Materials suppliers have their own labor issues. That’s how they are justifying their price increases,” says Padgett. “They always find a way to raise the prices.”
Fuel prices have fallen more sharply, along with the price of oil overall. The PPI for energy inputs to apartment construction fell 26.8 percent over the 12 months that ended February 2016.
“There have been huge declines in diesel fuel costs,” says Simonson. That affects the cost of running construction equipment and delivering construction materials in trucks. “The cost of fuel is rolled into the cost of many delivered goods.”
“When fuel costs go up, I get all these phone calls from all of my subcontractors,” says Padgett. “But when fuel costs are down, I never hear from them.”
Prices have also dropped for many metals. “There were big drops over 10 percent in the cost of copper, steel and aluminum — although those prices have started to move back up in the last couple months,” says Simonson.
Gypsum prices also fell as gypsum makers increased production, dropping the united front they had held through the long, slow recovery. That lower production allowed them to increase prices, even with relatively slow demand.
Prices fell 4.9 percent over the 12 months ending February 2016. “Gypsum makers were able to push through a price increase last year. That discipline seems to have eroded,” says Simonson.
Relationships with suppliers can help developers and contractors control the cost of materials.
For example, PinPoint began a strong relationship with a steel fabrication company in Texas after buying a development site from the firm. Reliability and favorable pricing motivated PinPoint to use its steel to build projects including a New Mexico community, now under construction.
Some developers and contractors are looking to international suppliers for a few materials.
“We are starting to look to China for materials,” says Turner. PinPoint began by experimenting with granite from China. “You give them the measurements and hope the pieces come off the boat right… so far, so good.”
From these successes, PinPoint is beginning to look at buying other materials from China like light fixtures. For example, a decorative fixture such as a lobby chandelier might cost $30,000 from an American manufacturer and only $5,000 from a Chinese producer. “Returning it is a pain,” says Turner.
“Anything from China is less expensive, and anything made in America will last longer,” says Padgett. “There are some quality products that come out of China. You just have to know the suppliers.”
Different places, different prices
Construction prices can also vary widely from one metro area to another. For example, in the first quarter of this year PinPoint began construction on two assisted living and memory care seniors housing communities: one in El Paso, Texas, and another in Santa Fe, New Mexico.
But one of these facilities is proving to be much more expensive to build largely because of the cost of labor and materials, even though it is just a six-hour drive between the two construction sites.
“It is costing us a million dollars more to build the exact same building in Santa Fe,” says Turner.
The project in El Paso has $9.2 million in hard construction costs, or $141 per square foot, compared with $10.3 million in hard construction costs, or $150 per square foot, for the project in Santa Fe.
The two properties are almost identical, with similar floor plans and the same flat roof and stucco exterior. PinPoint even uses the same rendering to represent both projects in its marketing materials.
PinPoint plans to start construction on a total of five new assisted living and memory care communities this year.
Different regions also face very different challenges. Specialized workers can be hard to find in markets in much of the Southeast, for example, where construction projects tend to be in the form of low-rise, stick-frame buildings like single-family homes, and the workers tend to be less specialized.
Larger, more densely populated markets that feature a variety of construction types tend to support a greater variety of specialized workers. The bigger markets also provide the infrastructure necessary for training and apprenticeship programs that produce these specialist workers.
“In the Southeast, we try to hire local,” says Hill. “Sometimes we end up bringing in our own people. We rent an apartment and we truck them down from Chicago.”
Construction costs are also rising more rapidly in the desirable, high-barrier-to-entry markets where Capitol Seniors Housing is developing seniors housing properties.
The private equity firm, based in Washington, D.C., is planning to start construction on at least six seniors housing communities in 2016. These developments are located in the largest 25 U.S. metro areas. The developments include four in New Jersey, one in the Chicago suburbs and one in Northern Virginia.
These are all markets where developers of conventional apartments and hotels are highly active, pushing past barriers to build as many multifamily units or guest rooms as they can.
“You are going to be up against hotels and conventional multifamily developers — it’s all the same materials that are going into their projects,” says Capitol’s McElwee.
“Steel and concrete prices have gone up,” says McElwee. “There are some markets that have lower construction costs. Those aren’t the places we are focused.”