Rising Construction CostsRising Construction Costs

presented by:

Kevin Cobb AIA/ARA, the Addington PartnershipWilliam Duncan IV, Taft College

December 2004

OverviewOverview

Construction Economy has become known as Construction Economy has become known as the ‘Dismal Science’the ‘Dismal Science’

Third quarter impacts known now, large Third quarter impacts known now, large increase, but looking stable forwardincrease, but looking stable forward

ENR 12/04ENR 12/04, “After a tumultuous year, price , “After a tumultuous year, price increases for construction products appear to be increases for construction products appear to be settling down. But while escalation is slowing, settling down. But while escalation is slowing, prices will remain stuck at historically high prices will remain stuck at historically high levels.”levels.”

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

20 year avg. 2003 avg. 2004 projection

Industry Index TrendsIndustry Index Trends

BCI – Building Cost Index

CCI - Construction Cost Index

MPI – Materials Price Index

41%

18%

10%

0.9%

3.1%

Basic ReasonsBasic Reasons Material prices rising at unprecedented ratesMaterial prices rising at unprecedented rates

Steel, re-bar, copper, concrete, piping, lumberSteel, re-bar, copper, concrete, piping, lumber PetroleumPetroleum

Shipping, used in numerous productsShipping, used in numerous products Overhead increasesOverhead increases

Healthcare, Worker’s Comp., LiabilityHealthcare, Worker’s Comp., Liability Labor market weak, less skilled workers Labor market weak, less skilled workers

availableavailable High demand and material shortagesHigh demand and material shortages

World market is now larger consumerWorld market is now larger consumer

EffectsEffects

Public construction forecasted to pass Public construction forecasted to pass residential market in 2005 (first time since residential market in 2005 (first time since early 80’s)early 80’s)

Housing market increases projected to stall Housing market increases projected to stall next yearnext year Rising interest rates 5.5% up to 7.5%Rising interest rates 5.5% up to 7.5%

Trip point generally thought to be 6.5%Trip point generally thought to be 6.5% Could free up both supply and demandCould free up both supply and demand

ReactionsReactions

Value Engineering in each projectValue Engineering in each project Not at expense of future costNot at expense of future cost

Aggressive bidding contactsAggressive bidding contacts Shorten bid proposal windows where possibleShorten bid proposal windows where possible Chancellor’s Office has recognized the Chancellor’s Office has recognized the

problem and quickly reactedproblem and quickly reacted However no augmentation for Prop. 47/55 projectsHowever no augmentation for Prop. 47/55 projects

Measure A ImplicationsMeasure A Implications

Budgets impacted in first batches of projectsBudgets impacted in first batches of projects Adjustments made to out-year projects to Adjustments made to out-year projects to

compensatecompensate Contingency funds were used to augment Contingency funds were used to augment

increases and Value Engineering was done increases and Value Engineering was done to reduce costto reduce cost Contingency remains above $7MContingency remains above $7M

Looking at the FutureLooking at the Future

Construction increases happened in time to Construction increases happened in time to be included in future projectsbe included in future projects

Chancellor’s Office has increased funding for Chancellor’s Office has increased funding for future projectsfuture projects Example, Science Laboratory allowance was Example, Science Laboratory allowance was

$235.56, is it now $401.30 per square foot$235.56, is it now $401.30 per square foot Costs are projected to remain at or near this Costs are projected to remain at or near this

level for 24-36 months then climb at historic level for 24-36 months then climb at historic ratesrates

Questions?Questions?

Sources:

Engineering News Record COM

Construction COM

Construction Guide COM

California Construction COM

SC Anderson ACBO Presentation

Building Journal COM

American Institute of Architects ORG

Society of American Registered Architects ORG

Associated Builders and Contractors COM