In the last few years, the construction industry on a national level has been in uncharted waters with rapid cost increases in virtually all segments of the industry. This uncontrollable and unpredictable inflation is more volatile in certain sections of the country and in certain sectors of construction. But, make no mistake—it is a national and, in some respects, a worldwide problem without any clear-cut resolution in sight.

This phenomenon is affecting both the residential and commercial markets, but it has a particularly devastating effect on not-for-profit organizations. Specifically, many churches and private schools do not have the resources to increase budgets, regardless of unprecedented construction cost increases.

History: Where We Were
For almost 20 years, inflation in the construction industry was not a major factor when considering a project timeline. In the decision-making process, whether it was best to build this year or the next year was not a critical decision. Oftentimes, it was viewed as more prudent to wait for increased capital, allowing additional time for the planning and design. That is clearly no longer the case.

Today, it is a very real possibility that project costs may increase by 10%, 20% or even 30% in a year's time, making inflation one of the biggest factors in establishing a budget and discussing the time schedule for a project. Current inflation rates can easily become the biggest stumbling block or enemy of a project moving forward.

For most of the 1990s and early 2000s, construction estimates were easier, with many suppliers allowing a "locked in" price for the duration of the project—many times, as long as 18-24 months. Prices were competitive, and "low bid" mentality was a common motivation for selecting a project delivery method. Again, this is no longer the case.

Awareness of changing attitudes and the realities within the construction marketplace is an essential start to a successful project.

Today: Where We Are
The moderate inflation rates experienced by the construction industry (1990s through 2003) may go down in economic textbooks as a fluke made possible by the rare combination of cheap imports, energy and money combined with a relatively weak global economy. Those conditions now are changing.

Strong demand overseas and the weak dollar are preventing imports from stepping in to cap domestic price increases. Oil prices have reached record highs for much of the year, and the Federal Reserve Board continues to nudge interest rates higher. In addition, the emergence of China as an economic powerhouse has shaken up global supply and demand, pushing up commodity prices and skewing international freight costs.

Although it is only one factor in the change of our global economy and an increase in inflation in the United States, the impact of the emergence of China cannot be over emphasized. A look at the staggering facts that follow give a glimpse into the magnitude of the cause and effect of China's building boom:

In 2005, China consumed:

* 1/2 of the world's cement
* 1/3 of the world's steel
* 1/4 of the world's copper
* 1/5 of the world's aluminum
* 1/10 of the world's oil (10 million barrels/day)

China is the 3rd largest auto producer in the world today and is poised for continued growth in 2006 and beyond. It is investing $20 billion in construction for the 2008 Olympics, with supplementary construction planned for the 2010 World's Fair.

Increased demand for oil and natural gases combined with recent natural disasters including Hurricanes Katrina, Wilma, Rita and Charlie are placing an unbalanced weight on the supply chain for construction materials. These factors merge with the continued growth in the residential and commercial markets to make the change very clear. A return to the pre-2003 pricing levels and traditional methods of bidding and building will not likely occur. It is indeed a new world—at least a new design build world.

Not-for-profit organizations must understand these changes in order to grow and build successfully.

Tomorrow: Where Do We Go From Here?
Overall construction spending saw double-digit increases in 2006, and 2007 increases are moving that direction also. The construction industry has fewer opportunities to reduce or substitute materials compared to other industries. For example, roads will be constructed of concrete or asphalt; commercial buildings will be constructed of concrete/masonry products or steel and so on. Sometimes, new products enter the market, but they will not be the answer to intelligent building in the future. The answer will not be to work harder, but rather to work smarter.

This begins with how a business, church or school approaches the process of building. The days of bidding a project to find the low bid as the "right" bid/builder are over. Bid amounts may not even be a factor in the future, as recent industry publications suggest that cost escalation clauses and "no price guarantee" contracts are becoming more common.

The approach used by a church to select a design or construction professional may very well return to the point that it should be: qualifications, reputation and relationship. Historically, these qualification based selections have resulted in better projects from both a cost and performance standpoint.

In addition to choosing the right approach in selecting a design or contracting team, proper planning and preparation for the project is the next factor to ensure success. One aspect of preparation is the financial feasibility of the project. Good financial preparation means including a contingency. Literally, the word contingency means preparedness for uncertain conditions. Nothing is more uncertain in our current economic time then trying to guess the inflation factors for one, two or three years down the road. Simply put, a reasonable contingency, with a minimum of anywhere from 5% to 10%, is good business practice. It is also the only way to be prepared, guarantee good stewardship, and have a successful project.

Brian A Walsh, DBIA is the owner of The Collage Companies, a successful Florida Design Build Firm and Certified General Contractor. He has constructed several award-winning projects with an emphasis on the design build process for churches, Christian schools and ministries.