Construction Cost Inflation
During the first four months of 2011 Auld & White experienced significant cost increases compared to projects that were either budgeted or actually priced in the spring through early fall of 2010. The best example is a warehouse expansion project in the Jacksonville area. Originally scheduled to start construction in August 2010, the various scopes of work were bid to qualified vendors such that a minimum of three qualified bids were received for each work scope. This resulted in a proposal equal to $44.68/sf.
As is quite common, the project was delayed until January 2011, when the client decided to move forward. New bids were solicited in February 2011, resulting in a proposal equal to $47.36/sf. This is an increase of $2.68/sf or 6%. Seems mild until you study the project’s building components and see that the electrical scope was up 17%, the structural scope was up 18%, the roof scope was up 24% and the fabricated reinforcing steel was up 49%.
What would cause these significant increases? Certainly not “demand” since construction unemployment remains high, new projects permitted remains low, and Architect and Engineer billings also remain low.
When looking at “supply”, it is apparent that manufacturers have reduced capacity by closing their higher cost plants. We are seeing tighter inventories. We experienced increased lead times. For example, high performance glass for two projects during the fall of 2010 experienced significantly longer lead times, increasing from 8 weeks to 12 weeks. In addition, according to an article published in February 2011 by The Associated General Contractors of America, there were changes in Producer Price Indexes for “Basic Inputs Important to Construction” such as certain raw materials including crude petroleum, iron & steel scrap, stainless steel scrap, copper ores, and copper scrap. All experienced increases.
Now, back to the project and the 49% increase in fabricated reinforcing steel. It is the most compelling example of increases mentioned as it is job specific fabricated material with no onsite labor. The same vendor who provided Auld & White with a low quote in July 2010, was again low in February 2011 – thus giving us a good opportunity to draw conclusions about the cost increases. The cost structure of reinforcing steel is highly dependent on the price of steel scrap. Thus our conclusion is the raw material price increase of the steel scrap is now showing up in the cost of reinforcing steel.
It is apparent that there are other finished products such as electrical components (conduit, wire, panels, light fixtures, etc.), PVC components, structural steel components, mechanical components (pipe, duct, equipment, etc.) and others that contain steel, copper, and petroleum raw materials that are increasing in price in early 2011 as these raw materials increases make their way through the supply chain. We are now seeing them in the proposals and quotes we are receiving. Having been in this industry since the late seventies, I believe history will show that the bottom of this current economic cycle was the late spring to summer 2010.