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Costs whipsaw builders

Shortages in materials, labor keep jacking up local prices

Sacramento Business Journal, 11/4/2005

Building material price increases caused by the Gulf Coast hurricanes, on top of long-term price trends, are adding millions of dollars to the cost of construction in Greater Sacramento.

Contractors and builders have been eating much of the cost in the short term, but the price spikes - coming atop steady increases driven by higher global demand for building supplies - are making the Sacramento region's new homes more expensive, jacking up office rents and boosting the price of building schools and other public works.

And while affordable materials are scarce, work is not. Swamped contractors are bidding top dollar for jobs, adding to construction expense, and labor costs also have inched up.

The effects have been startling:

The per ton price of mixed asphalt rose about 25 percent in the past month, reaching $55 a ton from $45 a ton.

Brad Des Jardin
President of DesCor Builders

Oil price increases, along with refinery closures from the hurricanes and other mishaps, have pushed the price of heavy oil used in asphalt up 75 percent in just three months. PVC pipe has nearly quadrupled in price in some cases, and some contractors reportedly can't get it at all.

One local school district found that the cost of building a high school has risen $20 million since 2003. Another saw the price of a high school jump $30 million from the original 2002 estimate. Some districts may cut buildings out of their plans to keep costs down.

The twin of a South Natomas office building that cost $80 a square foot in 2003 will cost more like $94 a square foot next spring, forcing up the rents tenants will have to pay.

This year everything seems to be more expensive to the besieged building industry.

In years past, "we'd have one or two segments rise significantly over the others," said John Gordon, a construction manager with Sundt Construction Inc.'s Sacramento office. "But now we're seeing consistent price increases in all building materials."

The builders, said Robert Fountain, an economist with California State University Sacramento, are hurting because they are absorbing the cost increases - at least until they can pass them on to consumers.

Across the board: Producers of all kinds of materials are commanding higher prices:

Concrete ingredients in September cost 8.9 percent more than in September of last year, and were up 14 percent from two years ago, according to preliminary data from the U.S. Department of Labor's Producer Price Index.

Gypsum products such as wallboard were up 13.7 percent from a year ago, and up 40.9 percent from 24 months ago. Drywall's cost has spiked 25 percent this year, said Terry Street, president of Roebbelen Contracting Inc.

Copper wire was up 27.8 percent from last September and 47 percent from two years ago.

Lumber, steel, plumbing products and other materials also are up from two years ago, some holding steady with last year's level and some up significantly.

Builders feel they are in a sleet storm of cost hikes.

Before Katrina, PVC plastic pipe cost 29 cents a linear foot. It now costs $1.15 or more per foot.

Brad Des Jardin
President of DesCor Builders

The Gulf hurricanes, plus a fire at a Southern California refinery, ongoing oil price increases and other factors combined to raise to cost of the heavy oil used to make asphalt by 75 percent. It's up to $350 a ton from about $200 three months ago, before Katrina struck, said Doug Urbick, president of Teichert Construction.

The per ton price of mixed asphalt rose about 25 percent in the past month, reaching $55 a ton from $45 a ton, said Brad Des Jardin, president of DesCor Builders. He discovered the price rise while putting in the parking lot for Roseville Commerce Center in Roseville.

While California Department of Transportation contracts will pay the contractor for materials increases, Teichert and other infrastructure builders must absorb the cost in contracts with private developers. "It can be hundreds of thousands of dollars in larger contracts," Urbick said. The public pays the Caltrans bills.

Infrastructure contractors also lay miles of underground plastic pipe. Plastic requires oil, and the rise in oil prices has boosted pipe prices 50 percent since Katrina, Urbick said.

Contributing to the shortage, some plants in the Gulf that make the piping are shut down, said Roebbelen's Street. "We've heard that some guys can't get it for construction."

Before Katrina, PVC plastic pipe cost 29 cents a linear foot. It now costs $1.15 or more per foot, Des Jardin said.

Another petroleum-based product in short supply because of the storms is polyethylene film, used as a shield to keep moisture away from concrete building slabs, said Bob Silva, head of Capitol Valley Commercial Construction.

Its price has climbed 30 percent since the gulf storms damaged a plant in Texas that makes the stuff. He also complained about hikes in asphalt and other items. "It's been difficult, because I have to absorb the up-charges myself," he said.

Just to make sure he's not getting overcharged, Silva has asked suppliers of some items to give him letters explaining why prices have gone up.

Because of the rapid changes, it's difficult for contractors to get suppliers to quote a price that's good for the traditional 60 days. Now it's more like 30 days; some suppliers won't set the price until a contract is signed, Des Jardin said.

Because of price increases and the threat of shortages, contractors say they have resorted to ordering larger quantities of supplies at set prices and storing them in warehouses.

The longer-term problem: Katrina and her kin, however, are not the prime culprits in rising construction costs. Observers expect the storms will create mostly short-term cost hikes.

But the cost of structural steel has risen 40 percent this year, and steel conduit is up 30 percent, with the increase starting well before hurricane season. That shortage is due to the U.S. building boom, combined with demand from China, Street said.

Among the hardest hit by these longerterm bumps are giant building projects such as school construction. Street, who keeps track of school construction bids, pointed to three bids in successive years to build almost identical buildings in different locations. In 2002, the bid was $155 per square foot. In 2003, it was $174 and this year it was $272. The difference was materials costs, he said.

Elk Grove Unified School District last month awarded Lathrop Construction Associates Inc. the job of building Cosumnes Oaks High School and a middle school. Lathrop's contract will come to some $88 million, said Constantine Baranoff, the district's director of facilities planning.

Because of the rapid changes, it's difficult for contractors to get suppliers to quote a price that's good for the traditional 60 days. Now it's more like 30 days; some suppliers won't set the price until a contract is signed.

Brad Des Jardin
President of DesCor Builders

He compared Cosumnes Oaks to the Pleasant Grove High School bid awarded just two years ago, using the same blueprints. Excluding structures in the Cosumnes Oaks bid that were not in the 2003 project, he found the new job will cost $20 million more. The hurricanes may have had some impact on the price, but the longer-term rises for materials are a bigger factor, he said.

He also noted that only two contractors bid on Cosumnes Oaks; he'd usually expect three to six bidders. The sheer size of the job may have discouraged some, but high demand for builders probably contributed, he said.

Another example: Roseville Joint Union High School District wanted to build a high school serving Antelope, at an estimated cost of $50 million, said Chris Grimes, director of facilities development. But voters rejected a bond proposal in 2002.

Last year, they approved a bond. But now higher materials costs have pushed the estimate to $80 million.

Both districts are looking at ways to scale back plans, possibly cutting or changing buildings. Roseville could use a state law that would allow it to sidestep upfront costs by leasing the school from the contractor - in this case, Roebbelen - until the construction cost is paid off.

Grimes, Baranoff and others believe the construction boom in this country and massive real estate development in China have taken a toll on the supply of concrete, steel and lumber.

Not just public works: In October 2003, development company BTV Crown Equities completed a four-story office building in its Crown Corporate Center office park alongside Interstate 5 in South Natomas. The cost to build the 120,000-square-foot structure was $80 per square foot. BTV plans to start a twin of that building next spring, but it will cost $94 per square foot - a 17.5 percent, $1.7 million increase, said Ron Russell, BTV's president.

He also blames the rise on the concrete, steel, and petroleum-based products absorbed by booming construction in this country and China. His contractor, DPR Construction Inc., figured that during the past three years steel pipe costs increased 50 percent to 60 percent; sheet metal increased almost 100 percent; journeyman labor costs increased about $10 per hour; and the cost of installed equipment, such as air conditioning, increased 5 percent to 6 percent a year.

The rents on the new building will have to "break new ground" to pay for the cost hike, Russell said.

New-home production and prices have likewise gone up, in part because of the shortage and pricing of materials, said Mike Oberg, vice president of purchasing for Beazer Homes of Northern California.

Prices rose dramatically last year and continued up at a slower pace this year, although there were sharp increases for some materials. He noted that the cost of construction has risen 8.2 percent per house at one two-story-home subdivision during the past six months alone, although others projects probably have not risen that much.

Among the materials that are pricier and in short-supply are fly ash for concrete, lumber, wall board, PVC pipe, plywood, oil and just about everything else. Some hurricane-affected products rose 40 percent and more in price during the past two months, although those prices are starting to drop, he said.

Rising prices will have at least one beneficial effect. They will prompt builders to be more innovative in construction methods, economist Fountain predicted.

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