After suffering through three years of strong price escalation, contractors appeared to be getting a break in 2007. Construction inflation tracked by the industry’s major general purpose cost indexes, which measure labor and materials costs, eased from 6% a year ago to 4% this quarter. Indexes measuring selling costs saw average annual escalation fall from 10% in the second quarter of last year to 8%. Such relief may be short lived as estimators say they are bracing for another round of material price escalation.
After easing from record levels, steel prices are starting to rebound again, says Karl Almstead, who is responsible for putting together the Turner Construction Co.’s cost index. That index saw year-to-year escalation decline from 12% last year to 8% this quarter. “Steel and rebar prices are rebounding after coming off of record levels,” says Almstead. He expects the rebound to take some prices past their previous peak, noting that steel prices already increased between 4% and 8% during the second quarter.
Preliminary June research indicates that the annual escalation rate of the Rider Levett Bucknall index may slip back to 7.5% from 10%. But that could be it, warns Julian Anderson, a principal with the firm. “We are starting to hear rumblings of bigger increases coming along in the next couple of months, mostly for structural-grade steel,” he adds.
The Rider Levett Bucknall (formerly Rider Hunt Levett & Bailey) is a “selling price” index. “It measures what the market will bear,” says Anderson. “Right now, the market is supporting a lot of increased margins.”
“I have a real big warning sign out for heavy structural prices,” says John Anton, steel analyst with the Washington, D.C.-based forecasting firm Global Insight. “Higher prices are coming and supplies will be tight, with allocations being a possibility,” says Anton.
The main culprit is the combination of the weak dollar and strong global construction markets. This is not only cutting back on imports, which the domestic market traditionally has relied on to cap price increases, but it also is luring domestic product into the export market. The U.S. steel industry has become a net exporter, not by a large margin but enough to turn the tables on supply.
“The fact that we have become a net exporter of certain grades of steel means that total supply is lower than it has been at any time since 2005. And today’s construction demand is much strong than it was back in 2005,” says Anton.
Prices for reinforcing bar rose $55 per ton in March and another $55 in April, bringing average prices to $606 per ton, says Anton. Structural steel prices rose from $649 per ton last January to $730 in May, he adds.
“I think we have seen the spike in rebar but structurals have a dangerous upside,” says Anton. He predicts that structural steel prices won’t peak until the first quarter of next year.
“We are braced for another round of price escalation and it’s going to be terrible,” says Don Short, president of the Omaha-based estimating firm Tempest Co. “We just bid on a boiler repair and both prices we received came in double what the owner was expecting.”
Hidden Labor Costs
It is higher labor costs that really have Short concerned. “You can’t find labor and contractors are using a lot of incentives to attract workers,” he says. “When you add up all these incentives, the cost of labor is going up an easy 20%, says Short. “And that is not reflected in any of the industry statistics or indexes.”
For example, per diem rates to get workers to the jobsite have risen from $5 per hour two years ago to $7 to $12 per hour today, says Short.
But the real cost killer has been a trend toward longer work weeks and the guaranteed overtime firms are promising workers, says Short. He notes that 50- hour work weeks are becoming common and he believes that a 60-hour work week is “right around the corner.”
That guaranteed overtime could add 15% to a project’s labor costs. In addition, “you can count on spending another 10% due to efficiency loss across the board by going to a 50-hour work week,” says Short. Finally, many contractors will mark up their margins for the higher labor costs. Overall, a project that normally may have a $500,000 labor estimate could now be spending $642,000 on labor. “I’m using 5% to 8% for escalation but my estimates already have these higher labor costs factored in,” adds Short.