BUILDING SCARCE RESOURCES ARE COSTLY
Rising construction costs are putting pressure on clients and the construction industry alike. Why construction projects are becoming more costly, and how HOCHTIEF implements its long-term projects in compliance with contracts.
Germany is experiencing a building boom. High-rises and civil engineering projects are mushrooming—especially in major cities with scarce housing but a big influx of new residents, and in places where new bridge, road, and tunnel infrastructure is needed. However, at times this boom is also a cause of concern. That’s because the construction industry requires massive amounts of material and lots of skilled workers. And the inputs that are needed are becoming not only scarce but also expensive. The main question is not whether a construction project as a whole costs more today than it did ten years ago. Much more crucial is the challenge of calculating costs accurately for a predefined period of time—the length of the project—and being competitive. The main goal is always to negotiate a fair contract price and then to stay within this limit, while guaranteeing the project’s full functionality and top quality.
EVERYTHING COSTS MORE TODAY
In recent years there have been massive price increases for materials such as gravel, crushed rock, and wood. Sand is another example. It seems to be available in unlimited amounts, but that’s not really the case. In 2018, 40,000 megatons of sharp-edged sand were used worldwide, mainly for producing concrete and mortar. This much sand would be enough to build a highway encircling the earth four and a half times. In German metropolitan regions such as Berlin, Hamburg, and the Rhine-Main area, all of which are centers of the construction boom, sand is already becoming a scarce commodity. That’s because its availability is very dependent on regional conditions. In many regions it’s becoming uneconomical to use sand, because of high logistics costs. That has also been the experience of René Schlaubke, Head of Procurement for all the shell construction operations at HOCHTIEF Infrastructure, which uses exactly these materials. “The dry summer has made it more difficult to transport heavy bulk materials along waterways. As a result, the prices are rising,” he says. Some types of skilled workmanship, especially in the areas of technical building installations and shell construction operations, are also becoming more expensive. “At the moment, the available capacity just isn’t sufficient to handle the construction needed,” says Wolfgang Klee, the HOCHTIEF Head of Procurement, who represents the local purchasing agents.
AN INTERNATIONAL PHENOMENON
All the construction companies are basically struggling with supply shortages. That’s happening not only in Germany, where the construction industry has continued its steady growth rate of 1.9 percent, but also in the USA, where the growth rate is somewhere over twice as high. HOCHTIEF’s U.S. subsidiary Turner Construction Company, for example, compiles an annual construction materials index that reflects the costs of materials and wages, as well as productivity. In 2017, the average value of the index rose above the threshold figure of 1,000 for the first time, and in the second quarter of 2018 it rose further by almost five percent. By way of comparison, the index value for the base year 1967 was 100. On the other side of the globe, in Melbourne, so many tunnels are being built at the moment that the clients have created the first training center in Australia for tunnel workers. Thousands of local workers will be trained there as specialists in tunnel construction. If the growth in the construction industry—which Arcadis forecasts will continue at 2.3 percent per year until 2023, also in Germany—continues, the sector may soon be searching for creative solutions.
REDUCING COSTS THROUGH INNOVATIONS
HOCHTIEF takes various measures to ensure that it can stay within the contract price without making any sacrifices regarding a project’s quality or functionality. It signs binding contracts with its suppliers at an early stage, negotiates fair prices with the client on the basis of recognized price indexes, and/or proposes an optimized construction plan before a project begins. Among other ideas, Guido Hill, the Head of Procurement at the Building branch of HOCHTIEF Infrastructure in Hamburg, is considering the use of lightweight walls as an alternative to massive ones. “They cost less than massive walls, can be built more quickly, and have the additional advantage of being easily adaptable to new usage requirements,” he says. In another project, an alternative fastening technology for facade elements can reduce prices, while fulfilling the architect’s requirements. “With regard to the scarce resource of specialized workmanship, we use our experience from other projects and our familiarity with the market to find companies we can rely on to optimally fulfill our needs, not only in terms of quality but also in terms of cost based on the principle of the total cost of ownership,” says Klee. In his opinion, the price is not necessarily the key consideration in the award of a contract. Moreover, HOCHTIEF itself is steadily developing. For many years now, HOCHTIEF has focused on BIM (Building Information Modeling) in its development activities. Now it’s making BIM part of its daily practice as well. “We’ve launched an initiative on three continents that involves the use of additional innovative systems, as well as digitalization across all units,” Klee reports. One example he cites is the use of drones for tasks such as measuring earthmoving during highway construction. “Innovative solutions, which may include the suppliers and subcontractors, help us to be economical and efficient,” he concludes.