Capping Construction Costs

In conversations with hospitality developers, architects and contractors, a top-of-mind concern today is rising construction costs, in addition to labor shortages and soaring energy prices.

“Get used to higher materials cost inflation,” advises Ken Simonson, chief economist for The Associated General Contractors of America (AGC).

Many materials are contributing to the increase. In the last 12 months, reports AGC, there have been increases of 87 percent for copper and brass mill shapes, 48 percent for asphalt, 40 percent for diesel fuel, 26 percent for gypsum products, 18 percent for plastic construction products and 15 percent for cement. Worse, contractors have reported shortages of cement and steel, with asphalt shortages expected soon.

The cause of the shortages range from the effects of last year's hurricanes to voracious demand from booming construction markets in Asia and the Middle East.

Terry O'Leary, vice president of development, Hersha Development Corp., has observed escalating construction costs the last few years “at a rate of about 20 percent a year,” he reports, although “we have a sense it's starting to stabilize. There's a little less pressure and a bit more availability.”

Hersha has developed a number of strategies to minimize the impact, says O'Leary. For example, “we'll only consider projects with high barriers to entry and high land costs, and we only partner with top brands like Marriott or Hilton where we have a much better certainty of a successful economic future.” On the construction management side, it's key to “buy very efficiently,” says O'Leary. “We also team with first-rate contractors, with experience we can rely on and good project management people who work consistently, on schedule and with long lead times.”

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