Anyone in the midst of a building project is well aware that costs are rising. During the last 15 months, construction prices have witnessed increases in excess of 30%.

The rising construction prices are not just because of rising energy costs. There have not been such dramatic, overnight price increases in the construction industry in over 25 years. Many departments, which just last year budgeted more than enough funds to build this year, are now finding themselves having to scale back their plans. Those that intend to build or renovate in the near future should take a moment to consider what's happening and what can be done about it.

Our firm receives construction bids on multiple projects each month, most of which are fire stations or other public safety facilities. For several years, overall construction prices had risen annually at around 3%. For the last couple of years, due to a slumping economy, construction prices have even been somewhat stagnant. The current 30% increase in construction prices has predominantly occurred since the fall of 2003.

Major culprits

The industry has always experienced price spikes in limited portions of construction due to some sort of material or labor issue, but current increases are almost unprecedented. Let's consider just a few of the major culprits causing all this price escalation.

By now everyone has seen, heard or read about the volatility in the steel market. Without doubt, the single largest price increase is due to the current state of the worldwide steel market. The last 20 years of actions taken, or not taken, by the steel industry had resulted in plummeting steel prices due to an oversupply. This caused steel producers worldwide, including in the United States, to slow production. With the oversupply, mining of iron ore and other steel-producing activities also slowed or stopped over the last 20 years. The construction industry became accustomed to the oversupply of steel and the resulting low prices. Unfortunately, now only a fraction of the U.S steel producers are still in business.

Then came the China explosion. No, that's not an accident at a fireworks factory. Several factors have caused China's economy to rocket upward in the last few years, growing 7% to 9% annually. Many believe that Chinese leaders are waiting to capitalize on the 2008 Olympics as a chance to reestablish their nation as a world power. China also is completing the world's largest hydro-electric dam, which will be larger than the Hoover dam.

With a booming economy comes a booming construction environment. In less than 10 years China has gone from being a net exporter of steel and cement to a net importer. While China produces 30% of the world's steel, they are currently consuming 35%. To put China's ambitious construction plans in perspective, they will be building the equivalent of 10 cities the size of Columbus, Ohio, or one city the size of London (7.2 million people) over the next five years. Because of supply demands in China, most of the scrap metal in the United States is shipped to China.

For decades, the United States has taken for granted a worldwide materials surplus and became dependent on imports to fill the country's needs. According to the latest reports, the capacity for bulk shipping is about three years behind demand. As a result, overseas shipping prices have doubled in the last year. There also is currently a three-year backlog in ship building. In this Catch 22, shipyards are having trouble acquiring the steel to build new ships because there aren't enough ships to supply them the raw materials.

In other words, even if building contractors can buy the materials needed for your construction projuect, they are paying exorbitant prices and will likely wait much longer than normal for delivery of custom items. The steel situation effects more portions of normal construction than you might think. Beams, columns, reinforcing steel, metal studs, doors, windows, duct, wiring and equipment are just a few items that are being adversely affected.

Material suppliers used to quote contractors prices that were good for 60 days. Many suppliers now are guaranteeing prices for only 48 hours. Many projects already contracted at lower prices are experiencing substantial waits due to shortage-induced delivery delays. Plus, necessary change orders during construction are being priced at much higher rates than the original bids.

For example, our firm designed and received construction bids for a new station for Old Richmond (N.C.) Volunteer Fire and Rescue Department in late 2001. The base construction cost was $74 per square foot. We have received base construction bids recently on a very similar station for the Clayton (N.C.) Fire Department at $104 per square foot. In an extreme case of volatile construction costs, we recently received base construction bids for the Murphy (N.C.) Fire Department at $160/square foot. This has forced the Murphy Department to re-bid the project in hopes of attracting a more competitive market.

Future possibilities

Another major factor in rising construction prices is the high fuel expenses. The costs of moving bulk materials from mines to mills to consumers are skyrocketing, as almost every construction material has to be transported to the site using fossil fuels. Also, many materials, such as roofing and asphalt, contain petroleum-based products. It has become a natural reflex to feel like crying every time you see the price at the pump. Now the cost trickle-down to construction prices is painfully obvious.

What can we expect of the construction industry over the next few years? Many experts are afraid to guess about the next few months, much less the next few years. But let's consider what those in the know are saying. In a spring teleconference sponsored by the National Association for Business Economics, steel industry representatives suggested that the sellers' market hit its apex in April and the price would stabilize by mid-summer. While that mid-summer stabilization did appear to take place, others are predicting another round of steel price increases by the end of this year. Either way, it will likely take material suppliers at least three years to catch up to projected demand. Don't expect lower prices anytime soon.

If U.S.-based materials production stagnates and world demand continues to increase, all materials are likely to rise drastically in cost. It would take suppliers years to catch up. Because China doesn't have an Alan Greenspan to slow economic growth and Chinese decision-making is so secretive, economists are generally perplexed about how to predict what will happen next.

China's economy is growing so rapidly that there is some fear of a collapse, which would mean a sudden, dramatic drop in material prices. That probably would be bad news for the rest of the world as well, since it could bring with it a worldwide economic slump. A more positive option is that the Chinese would slow their growth in the coming months. Even if China does slow down, India, with 1.2 billion people, could be the next sleeping giant ready to gobble up the industry's resources.

Price buffers

What can you do to avoid the greatest adverse impact to a construction project during this expensive climate? Here are a few ideas that may help.

1. Consider a scope change in what you need to build now. If portions of your facility are to accommodate future growth, design the building so that those portions can be easily built additions in the future. Maybe you can “shell-in” portions of the building and “upfit” them at a later date.

2. Investigate whether a construction type change can fit your needs and program. Steel, masonry, wood, pre-cast concrete and pre-engineered metal all have their advantages and limitations. Knowing which of these construction types will fit your program needs and budget is critical.

3. Consider treating projected items as “add alternate bids.” That means that you will get a base bid price to build just what you need without space for future growth or other upgrades, such as an extra vehicle bay to accommodate apparatus that will be acquired in a few years. You also will receive an additional alternate price to provide the growth or upgrades. Building contractors often offer a better price for an add alternate than if it were built into the base bid.

4. Set realistic construction budgets. Projecting construction costs several months early has never been more difficult than today. Protect yourself by using high cost estimates. Very few people will be upset with you when the project comes in under budget. I'm sure you can find something productive to do with the extra money, if any is left over.

5. Continually educate those who will provide your building funds. Whether it's a city council, town or county manager, or department board, you should regularly update them on current construction environments. Give them articles that describe the issue. Each time your designer provides an updated estimate, pass the information along. Don't let the decision-makers get to bid day without knowing what to expect.

6. Consider delaying your construction bids. There is no promise that prices will ever be lower than today. However, some fire departments are hoping that at least the unknowns and volatility of today's bidding climate will be better controlled a few months from now.

7. Finally, design wisely. Make sure you and the rest of your design team know how to maximize your program needs in the minimum space. Every wasted square foot will cost you more money today than it did last year, or even last month. It is more important than ever to select designers who know the ins and outs of your building type.

Don't let the current construction climate stifle your plans. Just proceed wisely and informed of your options.

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Ken Newell, AIA, is a senior principal with Stewart Cooper Newell Architects and has designed more than 100 fire/EMS stations and fire training facilities since joining the firm in 1988. He has provided architectural and consulting services for fire departments and municipalities in Florida, Georgia, Kentucky, Michigan, Nebraska, New Jersey, North Carolina, South Carolina, Texas, Virginia and Wisconsin. Newell also has spoken at various national and state fire conferences. He can be reached at info@scn-architects.com.