The Escalation Roller Coaster and What You Can Do About It

Since 1972 The Escalation Roller Coaster and What You Can Do About It Richard Vermeulen, Chief Estimator, Lead Economist Vermeulens.com

GoToWebinar - Housekeeping: Time For Questions YOUR PARTICIPATION Please continue to submit your text questions and comments using the Questions Panel For more information, please contact Mserrao@Vermeulens.com Note: Today s presentation is being recorded and will be provided within 48 hours.

Agenda Concerns Your concerns will be addressed and responses sent

Agenda Vermeulens Index 30 year trends Selling prices and margins Economics Relating Macro to Micro Indicators and Metrics Markets and Forecast Regional activity Forecast Cost Control Forum Strategies and Process

Vermeulens Index

Structural Steel Pricing 4000 3750 3500 3250 3000 2750 2500 2250 2000 1750 1500 1250 1000 750 500 250 0 3,400 1300 Markup Labor Material 2,850 2,750 2,375 3,750 1550 950 1000 650 1150 1150 1600 1075 1050 950 675 675 750 600 High Growth Market Adjustment Cost Recovery High Growth 6

Causes for The Current Construction Cost Escalation LESS WORKFORCE FEAR FACTOR PRODUCT AVAILABILITY STRICTER CODES STRONG MATERIAL MARKET HIGHER PROFITS

Market Watch

AIA Billings

AIA Billings

US Construction Volume 11

Assets versus Inputs

US Construction Employment (Thousands)

Construction Employment and Unemployment Rate

US Total Employment (Thousands)

US Job Growth

Year-Over-Year Construction Labor Growth 17

Forecast

City Construction Labor 12-Month Average (Thousands) Riverside-San Bernadino-Ontario Denver 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 110 105 100 95 90 85 80 75 70 65 60 55 San Francisco Boston 130 125 120 115 110 105 100 95 90 85 80 75 70 65 120 115 110 105 100 95 90 85 80 75 70 65 60 Year-Over-Year Growth High Growth Above Average Growth Average Growth Below Average Growth Contracting Market Market Expansion Riverside* (+53%) San Francisco (+52%) Denver (+49%) Boston (+44%) National (+21%) 19

City Construction Labor 12-Month Average (Thousands) Seattle Miami 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 170 160 150 140 130 120 110 100 90 80 Minneapolis Los Angeles 90 85 80 75 70 65 60 55 50 45 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 Year-Over-Year Growth High Growth Above Average Growth Average Growth Below Average Growth Contracting Market Market Expansion Seattle (+42%) Minneapolis (+41%) Miami (+41%) Los Angeles (+33%) National (+21%) 20

City Construction Labor 12-Month Average (Thousands) Detroit Atlanta 100 95 90 85 80 75 70 65 60 55 50 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80 Tampa Bay-St. Petersburg-Clearwater San Diego 100 95 90 85 80 75 70 65 60 55 50 100 95 90 85 80 75 70 65 60 55 50 Year-Over-Year Growth High Growth Above Average Growth Average Growth Below Average Growth Contracting Market Market Expansion Detroit (+33%) Tampa Bay* (+33%) Atlanta (+32%) San Diego (+31%) National (+21%) 21

City Construction Labor 12-Month Average (Thousands) Phoenix Houston 190 180 170 160 150 140 130 120 110 100 90 80 240 230 220 210 200 190 180 170 160 150 140 130 120 New York Dallas 400 380 360 340 320 300 280 260 240 220 200 240 230 220 210 200 190 180 170 160 150 140 130 120 Year-Over-Year Growth High Growth Above Average Growth Average Growth Below Average Growth Contracting Market Market Expansion Phoenix (+30%) New York (+27%) Houston (+26%) Dallas (+26%) National (+21%) 22

City Construction Labor 12-Month Average (Thousands) Chicago St. Louis 240 230 220 210 200 190 180 170 160 150 140 130 120 90 85 80 75 70 65 60 55 50 45 Philadelphia Washington DC 140 130 120 110 100 90 80 70 200 190 180 170 160 150 140 130 120 110 100 Year-Over-Year Growth High Growth Above Average Growth Average Growth Below Average Growth Contracting Market Market Expansion Chicago (+18%) Philadelphia (+15%) St. Louis (+13%) Washington DC (+11%) National (+21%) 23

Forecast

Agenda Vermeulens Index 30 year trends Selling prices and margins Economics Relating Macro to Micro Indicators and Metrics Markets and Forecast Regional activity Forecast Cost Control Forum Strategies and Process

Forum Concerns: 1) How has the impact of a lack of skilled labor played on cost escalation and construction durations? 2) What does the forecast look like for 2018 and beyond? Will this have a negative effect on construction growth domestically? 3) How do we package projects to take advantage of any market downturn in order to add scope we cannot afford in the current market? Additive alternates is an expensive strategy - is it our only option? 4) We are looking at construction types with a higher materials cost but faster erection with less labor; it that a good strategy in this market? 5) Cost escalation in my local micro market does not resemble the regional or national performance. Costs continue to climb here, which makes sense with all of the construction underway and announced. But how do I know I am not overpaying? 6) How do we establish a reliable way of forecasting cost escalation one year out? Three years out?

Contingency Project Contingency and Escalation Recommendations Design Contingency Preliminary Design 10% to 15% Schematic Design 6% to 9% Design Development 3% to 6% Contract Documents 0% to 3% Construction Contingency 3% to 5% Escalation - based on the Market Outlook and Local index 3% to 9% Bidding Contingency 0% to 5% Project Contingency (Owner) 5% - 15%

Procurement Strategies 1. GMP at DD 10-15% premium End costs vary depending on completeness of documents, relationship of Owner to CM, cost control process > 15% 2. GMP at CD 5-10% premium Proponents provide estimate of costs and commit to general requirements and fee > 10% 3. Modified Bid 0-5% premium Proponents provide GMP based on completed construction documents > 5% 4. Lump-Sum Bid 6-8 pre-qualified general contractors submit lump-sum bids for complete scope of work > 0%

Construction Management and Project Type Fast track projects no time for 100% Contract Documents prior to starting construction Busy construction markets CM relationships required to get subcontractors to bid on your project Financing requires a GMP in order to proceed Renovations or additions interfacing with operating facilities Complex and Unique projects

Procurement Strategy Texas A&M Engineering Education Center 5-400,000sf Projects Over 10 years 2-500,000sf Projects Over 10 years

Procurement Timing Construction Trendline (3.1%) CPI Trendline (2.7%) High Low Vermeulens Index Concept Design Structure & Envelope Enabling Interiors & MEP SD DD CD 220

Parallel Estimating and Reconciliation

Procurement Strategy Texas A&M Engineering Education Center 160 155 150 145 September 1, 2014 February 1, 2015 August 1, 2015 October 1, 2015 CM Draft CM Reconciled Anticipated Buyout $ Millions 140 135 130 125 Budget 130m 120 115 110 SD DD CD 100% CD

Fast Track Recommendations Distinct early packages (no cross pollination) Detailed concept design options to marry program and budget Timely decision making at conceptual design avoid escalation Use of bidding contingency to mitigate market risk GMP 100% Documentation = lowest cost

Cost Control Checklist Pre-design/Feasibility studies set expectations for budget analysis A/E/C Community Monitor bid results for local and regional projects Pay Attention to A/E and Contractor projects Consult with Contractors Pre-purchase long lead items Coordinate schedule and be realistic about it with users Continuous analysis of market costs most recent and nearby comparable projects weighted heaviest Require estimates and cross check at concept, schematic, and design development stages Clearly communicate specification levels required up front, including areas of flexibility Develop plans with good, better, and best specification options to prepare for market realities

Why Vermeulens Easy to Change Speed of Change in Design Hard to Change 65% 25% 10% Concept Phase Evaluate Options Together with Cost, Program, and Design visualization to Create the Foundation for the Mission, Vision and Values for your projects Success Master Planning Program Estimates Sketch Design Feasibility Studies Cost Model Narratives Design Phase Preliminary Design Schematic Design Design Development Construction Documents Construction Phase Manage the risk of Errors, and Omissions, Substitutions, Unexpected Site Conditions or Owner-initiated Changes On Time on Budget and meets the Clients expectations 5% 10% 85% Least Expensive Cost of a Change in Time and Money Most Expensive

Why Vermeulens Economics Databasing and Forecasting Value Process Optimization and Cost Control Green at No Cost Ecological and Economic Cost/Benefit Analysis Thank You