In any construction project, managing escalating costs and maintaining the budget are primary concerns. How a contractor handles cost escalation both internally and with clients—especially unexpected spikes like the jump in structural steel costs last year and the current increase concrete is seeing—can have a major impact on customer satisfaction and the ultimate success of the job.

For DPR, ongoing market research and analysis coupled with early, clear communication with owners about future cost projections has proven a winning strategy for mitigating the effects of cost escalation over time.

“As a product of our comprehensive preconstruction services, we are much more dialed into looking at cost escalation than just staying with historical numbers and historical benchmarks,” commented DPR’s Gavin Keith. “We take the time to really research and get as much current information on the economy as possible. We spend a lot of time with subs in understanding their wage increases and getting feedback, so we’re able to provide owners with an educated opinion. It’s a very dynamic process.”

Cost escalation on projects includes both the expected annual increases, as well as the unexpected and more volatile jumps tied to current market conditions. Known cost escalation factors include inflationary pressures that drive the cost of raw materials up a predictable level every year, historically 2 to 4 percent annually. Certain materials such as lumber see a cyclical trend that can be anticipated. Likewise, labor increases are a known cost factor, tied to union agreements.

Other factors influencing project cost related to market supply and demand are more fluid and thus more challenging to manage. Nowhere was the volatility of material costs more aptly demonstrated than last year, when the cost of structural steel suddenly jumped an average of $400 to $500 per ton from one month to the next, catching most of the industry off guard. Decreased production in the U.S. joined with surging demand in China created the “perfect storm” of supply and demand that drove huge price increases. Currently, concrete is experiencing cost increases due to short supply and increased demand worldwide, while oil continues to be a fluctuating cost factor that influences every aspect of a job.

The subcontractor market is yet another cost factor that must be understood and managed. Over the long term, this market will average 2 to 4 percent in annual increases; however, in any given year market pressures can drive much higher increases when subs are at capacity. DPR anticipates a potential spike in the next couple of years in some of its key markets in California, as hospital construction continues to ramp up and saturate the limited supply of qualified subcontractors working in that and associated market sectors.

While there is no magic formula, planning and communication are key ingredients in DPR’s approach to mitigating the impacts of cost escalation on its projects. DPR estimates provide customers with numbers in today’s dollars, with a separate subtotal included that takes cost escalation factors into account. “Early on, we establish dialogue to talk very specifically with the client about escalation, how it’s going to affect their budget and what they need to convey to people in their organization based on the choices they make,” Keith said. While it is clear that not every cost escalation factor can be predicted, by keeping a close eye on market trends and fostering strong communication with its clients from the outset DPR strives to keep the impacts of cost escalation in check.