A Conversation about Construction Costs

One of the most sensitive topics of discussion between contractors and homeowners is budgets. Many times, homeowners don’t want to disclose a project budget out of fear that a
contractor will raise their price to eat it all up. Likewise, contractors worry that if the budget they
quote is too high, it will scare away a prospective customer. If it’s too low, they may end up
being unable to cover their actual costs.

The topic is all the trickier in the current economic climate, when costs are rising faster than
anyone would like.

I don’t have any misconceptions that one little blog will solve the problem. But perhaps by
acknowledging that rising costs are an issue for both parties, we can spark a more honest
dialogue around this issue and maybe work together to help solve this potential roadblock.
Speaking as a contractor, I can tell you this: Prices are going up because our costs are going
up. As best as I can tell, here’s what’s driving the increases:

Aging workers, rising demand.

First, the construction industry is in the middle of what looks to be at least a 20 to 25-year
demographic crisis that has resulted in a profound labor shortage. For the last couple of
decades, young people entering the workforce have looked to fast-paced corporate jobs,
exciting technology careers, high-paying engineering positions and many other employment
opportunities rather than going into the manual labor sector. The construction industry is partly
to blame for this because, for many years, we could take it for granted that a steady percentage
of young workers would gravitate toward our sector. We didn’t need to market ourselves to the
labor force and consequently were slow to respond when the trends started to work against us
in the late 1990s.

Not everyone failed to notice the declining number of young people entering our industry. When
I attended the B4 building conference in 2012, one of the speakers devoted his entire talk to our
trade’s shifting demographic. At that time, he reported, the average age of a construction worker
was 48 and that number was rising pretty much in lockstep with each passing year. I haven’t
checked the newest numbers from the Department of Labor, but after 11 years without an influx
of young people, the average age of our workers could only go up.

In the meantime, demand for labor has increased due to housing shortages and aging homes
needing not just maintenance, but major renovations. To get the people they need to fulfill their
contracts, construction companies have had to pay higher and higher rates. This trend was
already in full swing before the COVID 19 lockdowns in every industry. Now some Wal-Mart
locations are offering more than $20 in starting pay. The trades have to compete with that.

Labor shortages have also forced the manufacturing industry to raise pay and benefits, driving
up the cost of the goods they produce. That, in turn, pushes up the prices of all the materials,
fixtures, and appliances needed for a home. 

Quality costs more.

In many respects, the construction industry is like many others that are competing for labor in a
tight market. But there’s another, industry-specific factor that’s driving costs – one that’s rarely
talked about. And that’s the quality of homes being built today.

At least in Wisconsin, the building codes have been steadily implementing the best practices
learned from leading tradespeople and building performance specialists. Today even the most
basic new home is going to perform much better than the average home built 20 years ago. This
change in the quality of code-compliant housing means that even the cheapest home you can
legally build is going to be more efficient, longer lasting – and consequently more costly – than
comparable homes of the past.

How to calculate costs.

As we examine construction costs, it’s important to consider factors like efficiency and durability
because they determine your actual cost of homeownership. The danger of failing to do so is
that your attempts to keep your costs down could end up costing you more in the long run.
If we look at the life of a home as 100 years, we need to consider not just the purchase price,
but the costs of operation and maintenance over that period. All those expenses can be
averaged into an annual cost of ownership: a very helpful metric for evaluating all the options as
we dig into a construction project.

There are many components of a home that we only have one chance to get right from the
beginning – things like quality of construction, effectiveness of insulation, and the ability to
prevent or withstand water damage. Factoring these considerations into your project at the
beginning will pay off over time. These are the items we really want to optimize on a new home
or addition, because once your home is built, it can be very expensive to implement effective
fixes for built-in shortcomings. Trust us, you do not want to spend the rest of your life paying for
the decision to cut that corner.

Bottom line: While costs are indeed rising, there’s still great value to be had from your home
construction or renovation project. As stated above, a new home today will be more economical
to operate and last longer than new construction even from 20 years ago. The key to realizing
that value is to work with a general contractor who builds to code and has earned a reputation
for quality work.It’s also important for homeowners and contractors to be honest and forthright
with each other, because clear communication and mutual understanding create a foundation
that will last.