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Rate of Decline in Construction Costs is Slowing, Economy on Rebound

Written by Peter L. Mosca on Tuesday, 22 September 2009 7:00 pm
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Turner Construction Company announced that the Third Quarter 2009 Turner Building Cost Index, which measures non-residential building construction costs in the United States, has decreased by 2.03% from the Second Quarter 2009. While construction costs have decreased by 10.77% since the beginning of the year, indicators show that that the decline is slowing in the Third Quarter. The Turner Building Cost Index number for Third Quarter 2009 is 820.

“With construction starts down in most sectors, market competition continues to drive declines in construction costs, said Karl F. Almstead, Turner vice president, who is responsible for the Turner Building Cost Index. "However, global and domestic economies appear to be stabilizing." At mid-year, mechanical and electrical equipment orders are also down and production for the balance of 2009 is expected to continue with this trend. Turner Logistics, a subsidiary of Turner, has announced that while a few products have remained at 2008 pricing levels, most have declined, with some manufacturers pricing equipment at or below cost.

“Countering the cost decline, material and commodity prices have generally remained level with the exception of non-ferrous metals that have been driven up by global demand," added Almstead.

“Since the beginning of 2009, we anticipate a decrease of 4.5% in the cost of equipment through the third quarter of this year," said Ben Kaplan, Vice President and General Manager of Turner Logistics. "We are also seeing lead times for equipment manufacturing to have improved by about two to four weeks. As the economy stabilizes and new equipment orders are placed, we expect to see an increase in lead time production due to reduced plant capacities." New research from Deloitte shows that the year 2010 may be when those orders Kaplan referred to might start being placed. The Deloitte study shows that approximately 55 percent of companies surveyed feel the U.S. economy will start showing signs of recovery in the first or second quarter of 2010; though 25 percent think relief won't come until the third quarter or beyond.

“After implementing initial cost cutting measures when the economy first began to tumble -- such as reducing salaries, layoffs and plant shutdowns -- many companies are now are confused about their next steps," said Kelly Marchese, principal, Deloitte Consulting LLP. "We believe these businesses should stop focusing on short-term concerns and look at their business in this new reality. Businesses need to focus on areas such as talent, growth and structural change so that their business doesn't just survive -- it thrives." The Deloitte survey and point of view, "Here Today, Where Tomorrow? Taking Action in Uncertain Times," is the result of hundreds of hours of in-depth meetings and discussions with nearly 100 organizations. Deloitte's point of view presents specific direction for the core offices of the c-suite, the CEO, CFO, CIO, CHRO and CIO, to consider. Deloitte also identifies the following three key economic phases and their timeframes that businesses need to recognize, and provides recommendations for corporate leaders to consider as they focus their business revitalization efforts during these uncertain times:

  • Phase 1: Over the Edge: companies were focused on shuttering their business, generating cash, and looking at tactical cost reduction. Survival was priority number one.

  • Phase 2: Lumpy and Bumpy: the current phase of the economic downturn where companies need to place the focus on structural changes, strategic investments and a resetting the profit model.

  • Phase 3: Growing into a New Reality: this is what companies need to prepare for; where the new economics, market realities and competitors emerge.

Like any recession, this one will play out in stages and will vary by industry," said David Brainer, principal, Deloitte Consulting LLP. "And, regardless of which stage your company fits, or the speed of change, you must move beyond tactical, reactionary moves and make structural changes needed to support growth. To make this shift, companies need to be proactive and prepare now for the new growth environment, whatever it may look like." [Editor's Note: Turner has prepared the construction cost forecast for more than 80 years. Used widely by the construction industry and Federal and State governments, the building costs and price trends tracked by The Turner Building Cost Index may or may not reflect regional conditions in any given quarter.

For more information and a copy of the Deloitte survey/point of view is available at deloitte.com .

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