July 23, 2007
Nailing down costs | Maine's construction industry searches for relief from rising fuel and materials prices
By Samantha Depoy-warren
As construction costs continue to climb and budgets buckle, Stacey Morrison knows that inevitably, buildings will be scaled back, vinyl siding will be substituted for wood and some jobs will simply be shelved. But even Morrison, the owner of Ganneston Construction in Augusta and a decade-plus veteran of the construction industry, was surprised last summer when one of her company's clients ˆ a central Maine school district ˆ opted to go ahead with their school addition plans but left the second floor unfinished when the project came in six percent over budget.
"We didn't finish the second floor. We just left it a shell," Morrision explains. "They really needed the space but they were willing to settle until they could get more funding."
The school district came back to Ganneston this spring, wanting to price out what it would cost to finish the second floor. One problem: Prices had continued to rise, meaning finishing the job would have cost even more money. As a result, the project again went unfinished.
With cutbacks like this becoming more common, those in the construction industry have had to rethink how they're doing business. "The heavy markup does not exist on construction projects like it used to," Morrison admits. "Today, the profit margins are much skinnier."
While those in the industry expect material prices to always rise, higher fuel prices, shortages brought on by building booms in China, India and Brazil, and escalating health care costs have caused a perfect storm to sock the industry in the nearly two years since Hurricane Katrina hit the Gulf Coast.
"We're seeing much more of an impact on the local market because of the global one," says Kathleen Newman, president of the Maine chapter of Associated Builders and Contractors in Augusta. "How do you compete with China? You just can't."
In the first five months of this year, the price of diesel fuel nationally was up 28%, says Jeffry Taylor, chief economist for the Associated Builders and Contractors, based in Arlington, Va. That jump may be manageable, if the price had not also surged 38% in 2004 and 47% in 2005. (Diesel prices rose a more manageable 2.3% in 2006.) Those fuel price increases hit especially hard in outlying states like Maine where freight charges to bring materials here are already high.
Those fuel figures are based on the material's price at its production point and often, by the time it arrives in a state like Maine ˆ situated at the end of the freight line ˆ those amounts are pushed higher, Taylor says.
And because Maine is rural, contractors here often have to travel many miles to get to a job site, a cost that gets passed on to the client.
Morrison says her company has become more selective in bidding on jobs that are further afield because of fuel price increases. In some cases, she adds, it's less expensive to budget in the bid for workers to stay overnight in the area, rather than traveling to a job site each day.
But fuel is only a piece of the price puzzle. Scrap steel prices were up 30% in 2006 and asphalt prices soared 35% last year and continue to climb in 2007, having already risen 12% through May, says Taylor. Copper scrap was up 32% last year, Taylor adds, with copper becoming such a hot commodity that the Maine media regularly reports thefts of copper wire from power and phone companies, including break-ins last May at two Central Maine Power substations in Farmington and Strong that resulted in multiple-hour service outages for thousands of customers.
As a result, construction companies are facing more challenges contending with fast-rising prices for everything from fuel for their equipment to materials for the job. "I don't know where all these prices are going ˆ if I did, I'd be a millionaire," says Taylor. "But what we tell our members is to expect prices to only go up. And if I happen to be wrong, they're happy."
Vinyl, not stucco
With little influence on materials prices in an increasingly global market, Maine's contractors and their clients are getting creative ˆ and not always with the best results. "Occasionally, we've had some bid requests for municipal projects where you just shake your head and say 'There is no way this can happen,'" says Morrison. "But what we see more and more is that people are scaling back on the level of finishes and quality of the materials. It's typical that everyone wants the best they can have, but then reality sets in and they have to scale back."
Things are further complicated when dealing with public projects with considerable lag time between bidding and building. Prices can jump dramatically in only a few months, which Gene Matthew, district sales manager for Barker Steel, admits is "kind of scary."
The Massachusetts-based company is the largest reinforcing steel fabricator in New England, and Matthews says that while the cost of a ton of reinforcing steel historically has risen $10-$15 a quarter, lately it's jumped by $20 a month. So on a bid his company won earlier this year for a new elementary school in Norridgewock that calls for 50 tons of steel, a delay of a couple of months will tack thousands to the final cost. To protect itself from price spikes, Matthews says the company typically uses escalator clauses in its bids with longer lag times. "But even within that time frame, spikes do happen," he says. "We're bidding now for projects that will begin in 2008, and that's kind of scary. But that's the price of doing business."
Lag times are being further elongated because of higher prices, says Newman, because bid prices come in higher than owners expect, which leads to a project being postponed. Then, when the project is revived months later with a scaled-down design, prices have continued to rise. "In a way, that's short-sighted because generally, prices are just going to go up," says Newman. "It's not ever going to get cheaper so if you've got the money, build it now."
But being able to build it now sometimes means resorting to cheaper materials. Ryan Senatore, an associate at the Portland-based TFH Architects, says that when clients opt for lower grade materials, they pay a price. "A lot of people look only at the immediate upfront costs," he says. "When you are trying to hit a budget, it's easy to go with inferior products, but two years down the road, you may have to replace it."
He advises those looking to build soon to consider the true costs of comparable projects and to keep in close contact with their architect and contractor. Senatore says he estimates a project's cost at different points in the process, and will look for ways to trim the budget if costs are coming in too high. "Instead of stucco, we might recommend vinyl siding," he says. "That's the hardest thing, though, because you basically have to be the bearer of bad news when you give them the design they want but it's twice their budget."
Senatore admits those in the industry are at the "mercy of the market" because of the delay in time between when his firm comes with a cost estimate and the project goes to bid, let alone the actual start of construction.
"It's been pretty tight the past two years, especially since Hurricane Katrina where within a few weeks, we saw costs for plywood and petroleum-based products just skyrocket," he explains. "We keep a very close eye on the market. That's really all we can do."
While some materials can certainly be scaled back to keep budgets balanced, unless the structure is severely sized-down, there is little savings to be found in reinforcing steel, which Matthews says has increased in price by $100 a ton since February, following a $300-a-ton rise during the previous three years.
"In our case, you really can't scale back. It's not like windows. This is serious stuff," he says. "When it comes to steel, a design is a design and you need this material to give a structure integrity."
With price increases out of their control and little room to move on materials like steel, Taylor said he encourages the ABC members to be proactive in their purchasing.
"A lot of our members who can do it are buying ahead of time. That's what makes it tough for the little guy, because they can't buy and store these huge amounts," he said.
Bargain hunters
Newman and the 175 member companies in the Maine chapter of the Associated Builders and Contractors have come to accept that material prices are unlikely to level off ˆ let alone fall ˆ in the near future. As a result, many companies have taken creative steps to cut overhead. For some, tracking workers' mileage has saved precious fuel dollars (for more on this, see "Idle time," this page). For others, the answer has been to develop a voice for Maine's 32,000 workers in Maine's construction industry in Augusta.
"I have a tagline on all of my emails that says 'Get into politics or get out of business,'" she says. "We're united as an industry more than ever. It's not like we can control pricing spikes so our biggest concern has to be what they are going to come up with next in Augusta that will cost us more money."
One such example is a piece of legislation considered this past session that would have mandated 10 hours of OSHA safety training for every worker on a public job site.
The bill was eventually killed in committee in an 11-2 vote, she said, but is expected to be brought up again next session. Newman says she worries that with prices on the upswing, construction companies will take cues from the legislature to disband their current safety programs and only do the bare minimum. "Safety pays ˆ we all know that it's expensive to have an injured worker," she says. "But that proposed legislation was a degradation to the current safety programs these companies have in place. It would become a race to the bottom."
Taylor, of the national ABC, points out that it's the cost of regulations like these that consumers often don't realize that further tax the industry. "There is a huge cost to doing this business," Taylor says. "You have material prices, fuel costs, health insurance and then the regulatory burden, which is a huge issue. It's not just what your hammer costs."
And as the materials market shows no signs of slowing down, Yankee ingenuity remains the most valuable commodity for those in Maine's construction market.
"We didn't finish the second floor. We just left it a shell," Morrision explains. "They really needed the space but they were willing to settle until they could get more funding."
The school district came back to Ganneston this spring, wanting to price out what it would cost to finish the second floor. One problem: Prices had continued to rise, meaning finishing the job would have cost even more money. As a result, the project again went unfinished.
With cutbacks like this becoming more common, those in the construction industry have had to rethink how they're doing business. "The heavy markup does not exist on construction projects like it used to," Morrison admits. "Today, the profit margins are much skinnier."
While those in the industry expect material prices to always rise, higher fuel prices, shortages brought on by building booms in China, India and Brazil, and escalating health care costs have caused a perfect storm to sock the industry in the nearly two years since Hurricane Katrina hit the Gulf Coast.
"We're seeing much more of an impact on the local market because of the global one," says Kathleen Newman, president of the Maine chapter of Associated Builders and Contractors in Augusta. "How do you compete with China? You just can't."
In the first five months of this year, the price of diesel fuel nationally was up 28%, says Jeffry Taylor, chief economist for the Associated Builders and Contractors, based in Arlington, Va. That jump may be manageable, if the price had not also surged 38% in 2004 and 47% in 2005. (Diesel prices rose a more manageable 2.3% in 2006.) Those fuel price increases hit especially hard in outlying states like Maine where freight charges to bring materials here are already high.
Those fuel figures are based on the material's price at its production point and often, by the time it arrives in a state like Maine ˆ situated at the end of the freight line ˆ those amounts are pushed higher, Taylor says.
And because Maine is rural, contractors here often have to travel many miles to get to a job site, a cost that gets passed on to the client.
Morrison says her company has become more selective in bidding on jobs that are further afield because of fuel price increases. In some cases, she adds, it's less expensive to budget in the bid for workers to stay overnight in the area, rather than traveling to a job site each day.
But fuel is only a piece of the price puzzle. Scrap steel prices were up 30% in 2006 and asphalt prices soared 35% last year and continue to climb in 2007, having already risen 12% through May, says Taylor. Copper scrap was up 32% last year, Taylor adds, with copper becoming such a hot commodity that the Maine media regularly reports thefts of copper wire from power and phone companies, including break-ins last May at two Central Maine Power substations in Farmington and Strong that resulted in multiple-hour service outages for thousands of customers.
As a result, construction companies are facing more challenges contending with fast-rising prices for everything from fuel for their equipment to materials for the job. "I don't know where all these prices are going ˆ if I did, I'd be a millionaire," says Taylor. "But what we tell our members is to expect prices to only go up. And if I happen to be wrong, they're happy."
Vinyl, not stucco
With little influence on materials prices in an increasingly global market, Maine's contractors and their clients are getting creative ˆ and not always with the best results. "Occasionally, we've had some bid requests for municipal projects where you just shake your head and say 'There is no way this can happen,'" says Morrison. "But what we see more and more is that people are scaling back on the level of finishes and quality of the materials. It's typical that everyone wants the best they can have, but then reality sets in and they have to scale back."
Things are further complicated when dealing with public projects with considerable lag time between bidding and building. Prices can jump dramatically in only a few months, which Gene Matthew, district sales manager for Barker Steel, admits is "kind of scary."
The Massachusetts-based company is the largest reinforcing steel fabricator in New England, and Matthews says that while the cost of a ton of reinforcing steel historically has risen $10-$15 a quarter, lately it's jumped by $20 a month. So on a bid his company won earlier this year for a new elementary school in Norridgewock that calls for 50 tons of steel, a delay of a couple of months will tack thousands to the final cost. To protect itself from price spikes, Matthews says the company typically uses escalator clauses in its bids with longer lag times. "But even within that time frame, spikes do happen," he says. "We're bidding now for projects that will begin in 2008, and that's kind of scary. But that's the price of doing business."
Lag times are being further elongated because of higher prices, says Newman, because bid prices come in higher than owners expect, which leads to a project being postponed. Then, when the project is revived months later with a scaled-down design, prices have continued to rise. "In a way, that's short-sighted because generally, prices are just going to go up," says Newman. "It's not ever going to get cheaper so if you've got the money, build it now."
But being able to build it now sometimes means resorting to cheaper materials. Ryan Senatore, an associate at the Portland-based TFH Architects, says that when clients opt for lower grade materials, they pay a price. "A lot of people look only at the immediate upfront costs," he says. "When you are trying to hit a budget, it's easy to go with inferior products, but two years down the road, you may have to replace it."
He advises those looking to build soon to consider the true costs of comparable projects and to keep in close contact with their architect and contractor. Senatore says he estimates a project's cost at different points in the process, and will look for ways to trim the budget if costs are coming in too high. "Instead of stucco, we might recommend vinyl siding," he says. "That's the hardest thing, though, because you basically have to be the bearer of bad news when you give them the design they want but it's twice their budget."
Senatore admits those in the industry are at the "mercy of the market" because of the delay in time between when his firm comes with a cost estimate and the project goes to bid, let alone the actual start of construction.
"It's been pretty tight the past two years, especially since Hurricane Katrina where within a few weeks, we saw costs for plywood and petroleum-based products just skyrocket," he explains. "We keep a very close eye on the market. That's really all we can do."
While some materials can certainly be scaled back to keep budgets balanced, unless the structure is severely sized-down, there is little savings to be found in reinforcing steel, which Matthews says has increased in price by $100 a ton since February, following a $300-a-ton rise during the previous three years.
"In our case, you really can't scale back. It's not like windows. This is serious stuff," he says. "When it comes to steel, a design is a design and you need this material to give a structure integrity."
With price increases out of their control and little room to move on materials like steel, Taylor said he encourages the ABC members to be proactive in their purchasing.
"A lot of our members who can do it are buying ahead of time. That's what makes it tough for the little guy, because they can't buy and store these huge amounts," he said.
Bargain hunters
Newman and the 175 member companies in the Maine chapter of the Associated Builders and Contractors have come to accept that material prices are unlikely to level off ˆ let alone fall ˆ in the near future. As a result, many companies have taken creative steps to cut overhead. For some, tracking workers' mileage has saved precious fuel dollars (for more on this, see "Idle time," this page). For others, the answer has been to develop a voice for Maine's 32,000 workers in Maine's construction industry in Augusta.
"I have a tagline on all of my emails that says 'Get into politics or get out of business,'" she says. "We're united as an industry more than ever. It's not like we can control pricing spikes so our biggest concern has to be what they are going to come up with next in Augusta that will cost us more money."
One such example is a piece of legislation considered this past session that would have mandated 10 hours of OSHA safety training for every worker on a public job site.
The bill was eventually killed in committee in an 11-2 vote, she said, but is expected to be brought up again next session. Newman says she worries that with prices on the upswing, construction companies will take cues from the legislature to disband their current safety programs and only do the bare minimum. "Safety pays ˆ we all know that it's expensive to have an injured worker," she says. "But that proposed legislation was a degradation to the current safety programs these companies have in place. It would become a race to the bottom."
Taylor, of the national ABC, points out that it's the cost of regulations like these that consumers often don't realize that further tax the industry. "There is a huge cost to doing this business," Taylor says. "You have material prices, fuel costs, health insurance and then the regulatory burden, which is a huge issue. It's not just what your hammer costs."
And as the materials market shows no signs of slowing down, Yankee ingenuity remains the most valuable commodity for those in Maine's construction market.
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