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Accounting for Rising Construction Costs

Controlling construction costs is always a prime concern for churches, and even more so during the current recession. Those costs continue to rise in 2010, which church leaders should note as they seek a loan, bonds, or other form of funding for a pending project.

As of September, the cost of construction was up 3.1 percent compared with the same point in 2009, according to the Engineering News Record. The main culprits: higher costs for materials due to cutbacks in production and increased global demand for materials.

"Between hurricanes, earthquakes, wars, and other things, we have shifted a lot of our materials to other places," says construction consultant Tim Cool. "That has created a supply-and-demand issue."

The labor situation remains in flux. The recession claimed many contractors and subcontractors and forced some of the survivors to enter markets they wouldn't otherwise consider, including the church market.

"Because the economy has everyone thinking cost consciously, churches are willing to look at someone who has less qualification but has a cheaper price," Cool says.

Labor rates are reasonable, but the law of supply and demand may be forcing them to rise. Due to the sharp decline in subcontractors, the survivors are beginning to charge more.

"Subcontractors were doing work at a loss to keep busy. But you can only do that so long. A lot of those 'too good to be true' deals are starting to dissipate," says Ed Bahler, chief executive officer of The Aspen Group, a church design-build firm.

Cost overruns, and how to avoid them, are another area where church leaders need to be careful when dealing with contractors.

"I know of one church that listened to a contractor who said, 'We can build it for x dollars a square foot.' But nothing had been designed yet," says Bill Couchenour, CEO of Cogun, another church design-build company. "If anybody tells you that, you should run away fast. Asking 'What does it cost [per square foot] to build a facility?' is like asking what a bag of groceries costs. It depends on what you put in the bag."

If a cost overrun does occur, who eats the difference? That depends on how the contract is written. Cool has seen churches increasingly use the "cost plus" or "open book" method, where the contractor shows the church its books, including material costs and what subcontractors are paid.

"This way, the church can see the numbers and benefit from potential savings along the way," he says.

Planning ahead to control costs can reap huge potential benefits for any church considering a building project. Cool suggests funding a contingency line item in the budget to cover the costs of inflation ahead of time.

"If you start architectural design now and start the project in 12 months, 2 to 3 percent for inflation is prudent. If you're not going to build for two or three years, go for 4 to 6 percent in the inflation contingency," he says. "If you have that already planned, when you get down the road and costs go up 4 percent, you don't have to go back and rethink the project."

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  • November 28, 2010

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