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Financial Perspective – November 2015

As contractors build backlog and concerns grow about a tight labor supply, there is increasing conversation about the impact on construction costs in the next few years. However, costs have been rising for several years now, in spite of intense competition, because of regulations and advances in technology that raise first cost.

Increasing costs are the result of a number of incremental bumps across several parts of the project scope. Most of these incremental changes come from changes in regulations or codes that govern safety, environmental impact or energy efficiency. The growing acceptance of green building is at the root of a number of the changes, as suggested standards have become codified, and the upside of those regulations has been that upfront cost increases result in significant operating cost savings over the life of the building. Other changes have meant to ensure human safety or environmental protection but created unintended cost consequences.

Regulations and codes affecting the building’s HVAC system have probably had the biggest impact on project costs. As the International Building Code (IBC) has been updated to include higher standards for energy efficiency, mechanical systems are being driven by increasingly more efficient equipment. Improvements in equipment efficiency has come from innovation by manufacturers, which carries a research and development cost. Manufacturers who can gain a bit on the energy efficiency of their competitors can charge a little more until the field catches up.

The IBC includes energy standards – based on AHRAE 90.2 – and an International Energy Code. Whenever these codes are updated to reflect improved standards, owners are required or incented to use better, more expensive equipment. An example of this kind of standard upgrade is the implementation of the Montreal Protocol on Substances That Deplete the Ozone Layer. Originally agreed to in 1987, the Montreal Protocol created a timeline for reducing and eliminating the use of hydrochloroflourocarbons, including R-22 refrigerant. The key dates in the accord were 2013 and 2015. This part of the agreement is impacting air-conditioning equipment manufacturing now.

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  • Bob Biehl
  • Director, Assurance & Business Advisory Services
  • (614) 947-5211
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