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Watching Costs: Companies expect rising expenditures to persist into 2023

SBJ Economic Growth Survey: Inside the Vision

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The myriad challenges facing companies, including rising inflation, supply chain issues and hiring difficulties, all are contributors to the rising cost of doing business the past couple of years, local industry leaders say.

For Tyler Bussell, co-owner of Bussell Building Inc., the rise in materials prices since the start of the coronavirus pandemic has been “substantial.” He says the cost in lumber is still up over 20% from where it was pre-pandemic, and steel has jumped roughly 50% in the last year. It’s contributing to the company raising prices for new homes, he says.

The price range for Bussell homes is $260,000-$500,000, he says, compared with $200,000 and $400,000 pre-pandemic.

“Each year, our prices have ticked up to kind of match the cost of what it is now to build,” Bussell says, noting materials costs are the main influence. “We’re not recouping our full cost increase but just recouping some.”

Bussell says getting metal materials, such as wire, has been increasingly difficult and more expensive this year. Shopping around at multiple supply houses and even out of town has been a frequent occurrence.

“We’ve had to go to Oklahoma to get wire. It’s just still difficult to get, and when you do get it, you’re paying a premium for it and not getting very much,” he says.

Chris Carson, president and chief operating officer at Carson-Mitchell Inc., says the higher materials prices his construction company has experienced the past couple of years show up when they receive bids from subcontractors. The bid prices sometimes have been nearly twice the original estimates.

“We’re talking 10% one year and 15% the next year,” he says of the fluctuating pricing of materials. “The last two years have been probably more than that.”

As subcontractors also struggle to get materials, project delays follow, Carson says. Carson-Mitchell was general contractor for the John Goodman Amphitheatre, a $6.4 million project for Missouri State University. It opened in October, several months later than anticipated due to supply chain delays, according to MSU officials.

“The subcontractors and suppliers are doing their best to get it done on time, but sometimes it just doesn’t work out,” Carson says. “We’re seeing that more and more often. The owners at the same time need the building done when they need it done. They’re planning for it, and when it’s not done, they’re not real happy.

“We’ve got to do what we can to make that pain as minimal as possible.”

A July report from commercial real estate services and investment firm CBRE didn’t paint a positive picture for U.S. construction costs, forecasting a 14% year-over-year increase by the end of 2022. That projection exceeds 2021’s 11.5% rise. However, the report did forecast cost increases will return closer to their historic range at 4% in 2023 and 3% in 2024, as issues with supply chain and inflation recede.

Making moves
Higher operating costs and workforce challenges are top of mind for Tim Clegg, CEO and co-founder of Hurts Donut Co. The Springfield-based company, which has 21 donut shops in 11 states, is on the verge of opening its newest at the intersection of Sunshine Street and National Avenue. A Dec. 1 launch is expected, Clegg says, adding the hiring of 75 employees for the new store is in progress.

“It’s a very competitive labor market right now. It’s very difficult to win that fight,” he says, noting hourly starting pay at Hurts is $13 and a tip share program can add $3-$5 more per hour, depending on the market. “We’re learning a lot right now as to what today’s hourly earner is expecting from an employer. Then we’re making adjustments to our benefits packages based on feedback.”

Aside from an increased investment in labor, Clegg says increased prices for material goods have been significant for the company to absorb.

“We really began to see increases at the onset of the war in Ukraine. The Ukraine is a major producer of wheat, and that’s really impacted the flour and milling industries, which obviously we are a consumer of,” he says, noting the scarcity of wheat has raised flour costs by 15%-25% over the past two years.

Additionally, the cost of paper board Hurts uses for its boxes and other products has increased roughly 30% over that same period, Clegg says.

To mitigate the pain of increased costs for the business, Clegg says Hurts raised its doughnut prices, noting the company’s goal is to keep any annual price bumps for its customers to less than 10%.

“We hate doing that, but at the cost of staying in business, we have to make adjustments,” he says. “Adjustments are necessary due to the increased costs of materials that it takes to produce and package our products, as well as the labor to physically produce our products in our stores.”

Higher costs of doing business were a common response in Springfield Business Journal’s 2022 Economic Growth Survey. Nearly 90% of respondents say  the cost of doing business worsened over the last year. Only 3% responded that it had improved, while another 7% felt it stayed the same, according to the survey.

Bussell says buying construction supplies in bulk has been an occasional long-term money-saving strategy for his company. However, over the last couple of years, the practice has become much more common.

“Whenever we can, we try to buy a lot of stuff in bulk. For example, as rebar would increase in cost, we would buy 20,000 or 40,000 sticks of rebar,” he says. “That lasts quite a while and is an expense upfront. We’re also able to do that with some lumber material.”

The 10-employee company also shops multiple manufacturers and tries to take advantage of incentives for using their products, he says.

“We’ve also been self-performing work that we typically haven’t,” he says. “Some of the framing labor costs have really skyrocketed, being such a skilled craft. We were able to get a crew of our own in-house and that saved us a little bit of money.”

Cloudy forecast
As the economic uncertainty of a recession in 2023 continues, Clegg and Carson are unsure their business costs will improve next year.

“We’re always kind of a glass-half-full outfit,” Carson says of his company. “We think things are going to be better. We can see what’s coming and adjust for it as good as anybody around here. Most general contractors are like that as it’s not a boom-or-bust type of business, necessarily. We make sure the margins are adjusted for the risk and the cost of the work.”

Bussell says his company hasn’t really felt the impact of the interest rate increases this year by the Federal Reserve and probably won’t until 2023. He doesn’t see any big changes in his business costs until there’s an overall slowdown in construction.

“If things do slow down due to the rates, then you’ll see that material supply increase,” he says. “Once they have more supply, that, of course, will drive the prices down. That’s the only thing I can see lowering costs.”

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