Gordian Develops Solution for Military Housing Construction Cost Escalation

Challenge: Informed Contract Escalation for Military Housing Renovations and Construction

Estimating the cost of construction and renovation work across a multi-year contract makes the government and contractors feel like they need a crystal ball, especially in today’s volatile construction market, and especially in constrained markets like remote locations. Even with the most accurate, in-the-moment cost data and detailed line-by-line estimates, variable commodity- and market-based changes render uniformly escalated line items inaccurate. Government and other owners have long sought a data-driven methodology to fairly govern cost escalation of contracts, both in the pre-award and post-award periods.

When you’re trying to build and renovate over 500 housing units via public-private partnership, having an efficient, reliable way to handle cost escalation is a clear necessity for keeping creating a competitive procurement environment, and it’s one that North Haven Communities sought out.

North Haven Communities (NHC) is a partnership between the U.S. Army and Lendlease, committed to creating sustainable communities that positively influence the day-to-day lives of American servicemembers and their families. To meet this end, NHC finances, develops, builds, renovates and maintains neighborhoods at Alaska’s Fort Wainwright and Fort Greely. These pristine communities feature modern, family-friendly amenities like theaters, dog parks and walking trails.

Today, NHC is responsible for more than 1,800 homes across 10 neighborhoods in Alaska. In 2011, NHC had a plan to renovate 309 housing units and build 366 new housing units, along with other amenities over a multi-year contract. The company had estimated total construction costs but needed a means of negotiating change orders at annual intervals to ensure its budget kept pace with changing construction costs.

Solution: A Custom Cost Index of Key Cost Drivers

NHC engaged Gordian to research and report on changing construction market dynamics for the Fairbanks, Alaska area throughout the contract period. Using our industry-leading RSMeans data construction costs, the initial Baseline Cost Study Report included surveys of material prices, labor wage rates, construction equipment rental costs and fuel costs to establish a benchmark for costs as of March 1, 2012.

NHC required separate analysis for vertical construction (dwellings and other structures) and horizontal construction (driveways, sidewalks, curbs and road pavement). To establish a baseline for these costs, Gordian engineers first reviewed contract documents furnished by NHC. From those documents our team designed a market basket of goods that contained key construction materials, labor trades, construction equipment and fuel. A cost model was developed, utilizing this market basket, and was priced effective March 1, 2011. Included in the model were initial hard costs and other contextual cost values, which then remained static.

The cost model served as the basis, or benchmark, against which future hard costs were measured and escalated, based on the cost index recalculations

Result: A Reliable Custom Cost Index That Keeps Pace With the Market

In the initial March 2011 Baseline Report, all cost indexes were set to 100.0. In subsequent reports, indexes were recalculated based upon new cost surveys. This objective analysis provided NHC with specific data on which to base contractual cost escalation, in accordance with the provisions of their Design-Build agreement, for work performed or still to be performed.

The Gordian team repeated the cost research techniques they used in the baseline report to inform the updates. They compared these results to the Baseline Report data and developed a cost index of 104.11 for vertical construction and 106.03 for horizontal construction in the first year’s updates. While those appear to be modest increases on paper, they represent significant cost increases for the scale on which NHC was working. Possession of these custom indexes enabled NHC to budget accurately to reach its business goals and meet its mission of providing vibrant communities for military families.

As the construction industry grapples with a volatile post-pandemic market, tools like a custom City Cost Index and other data-informed ways of fairly escalating costs are critical to ensuring continued interest in government projects and sharing project risk.