Hard-pressed by drastic cutbacks in state and local budgets, more highway contractors are working less, further sharpening competition and ratcheting margins down ever tighter. Key highway materials prices appear to be relatively stable, with few spikes expected. Although the end of major conflict in Iraq appears to have stabilized the price of asphalt and other petroleum-based materials, some executives warn that asphalt remains volatile.

Materials prices in Michigan "are probably the cheapest we've seen in 17 years," claims Hal Howlett, vice president of estimating, Angelo Iafrate Construction Co., Warren, Mich. For gravel, concrete, and other materials, "Everybody's just as low as you can go. There's just too many guys in town for the volume of work out there."

"Right now I don't see much in the way of spikes for the next year or so," says Tom Billings, vice president and estimating manager at FNF Construction Inc., Tempe, Ariz., which does about two-thirds of its work in its home state.

There are some exceptions to the downward trend. "Aggregates are a big issue here, and they're trending up" as resources in Washington state are depleted and trucking distances lengthen, says Ron Egge, senior estimator at Wilder Construction Co., Everett, Wash. Costs are increasing steadily, from about 3 to 5% per year, Egge estimates. The high volume of work in the Kansas City, Mo., region is also making some spec aggregates tougher to get, reports Tom Kellerman, chief engineer for Kansas City-based Clarkson Construction Co.

Asphalt, in particular, is "still a very volatile market," cautions Joe Prego, vice president for business development at American Infrastructure Inc., Worcester, Pa. "We did see a spike in asphalt just before the conflict in Iraq began," Billings adds. "Now that things are stabilizing a little bit, we're seeing the prices starting to go down," to about $165 per ton, he reports. Diesel fuel prices have dropped to 80¢ per gallon after reaching $1.30, Billings adds.

After hitting about $200 per ton two months ago in North Carolina, "asphalt fell 20 to 25% from what they were at the start of the war," says Drew Johnson, vice president of heavy highway at Barnhill Contracting Co., Tarboro, N.C. But that may not last; with the state department of transportation planning to spend an additional $150 million on asphalt, "I'm sure that the price of materials will have to go up some," he says.

American Infrastructure operates five asphalt plants and the market's unpredictability is affecting the bottom line. "We can't take all the risk and absorb what is happening on the open market with that type of supply," Prego says. In response, "We're protecting ourselves in every contract we write," he says. The company emphasizes to clients the importance of honoring start dates to lock in prices and avoid cost escalation. "If you flop into the next paving season...then you've got some exposure on asphalt," Prego says.

Such due diligence is a survival tactic in an atmosphere verging on the cutthroat. "In the ‘good' years, we used to complain about having 5, 6 or 7 bidders," says Iafrate's Howlett. Since last fall, "We've seen upward of 14 to 18 bidders on a job," he reports. Other contractors report similar statistics. For projects in the $10-million to $20-million range, "It's not unusual to see 10 to 12 bidders where years ago you might have seen 7 or 8," says Prego. At the end of 2002, Barnhill left just 2% on the table on a $41-million project in Virginia and $50,000 on the table for a $14.7-million job in North Carolina, Johnson says.

One source of intensified competition is larger contractors' increased interest in smaller jobs, says Clarkson's Kellerman. "We've had more people come in state, vying for the work. It's just highly competitive," agrees FNF's Billings.

As some contractors bid low out of desperation, others are becoming more selective. "There are certain jobs we won't even bid because we think there's going to be 8 to 10 bidders," Kellerman says. American Infrastructure, too, is seeking out more complicated and riskier jobs to reduce the competition. "When you get above the $50-million project size, you don't have a voluminous number of bidders," Prego points out.

Even though some contractors are being selective, competition is taking a toll on margins. Billings estimates that margins have dropped from the 10 to 12% range a few years ago to below 7% today. "We're seeing stiffer competition and the margins are a little more difficult to hold," says Iafrate's Prego. Bids in California are coming in at 5 to 15% below engineer's estimate, says Kris Kuhl, chief of the office of contracts awards for the state Dept. of Transportation.

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