Despite the area’s unprecedented building boom, the biggest factors in rising costs are national and international price pressures. However, local const-ruction companies are developing new strategies to deal with these pressures.

Fuel price jumps are an expected though unwelcome factor, impacting the cost of transportation for nearly everything used in construction. Also significant is the increased competition for skilled labor costs, an area where the busy Kansas City market has seen significant increases compared to many cities. Yet the largest factor may be dramatic spikes in costs for materials such as steel.

“Volatility is the one word I’d use to describe our market,” says Doug Fogel, president of Fogel-Anderson Construction Co. “We see changes literally on a day-to-day basis. We’ll see prices up one day, then they will recede a little the next.”

Jim Kistler, president of Associated Builders & Contractors Inc., Heart of America Chapter, says the region is experiencing steady or significant increases

in construction costs, especially in the area of fuel prices. “Some of it is very difficult to deal with, especially considering the volatility in the petroleum market. There’s no way you can plan for jumps

in diesel or gasoline like we’ve had.”

Rich Pennick, Vice President of Est-imating and Preconstruction for J.E. Dunn Midwest, says his company’s an-alysis shows an approximate six percent overall cost increase in the metropolitan area for the first quarter of 2007. For the past 18 months, Dunn has tracked five labor and six material cost categories. Fuel stood out as a major issue, although recent copper price increases were among the most dramatic.

“When you look at a product going up three and four times what it had been a year earlier, that’s significant,” he says. “But as we’re heading to $3 a gallon for gasoline, you can see the volatility of that will be an issue as well.”

Gus Rau Meyer, president of Rau Construction Co., says his biggest worries involve future increases. “Yes, prices are going up now, but in our opinion, they’ve actually moderated to some degree. The question is, is this the calm before the storm? Will they pick up when the construction season picks up this summer?

Meyer says fuel prices are a major issue in such concerns “Anything that takes a lot of energy to ship, like cement or asphalt, is very subject to oil and ener-gy price increases,” he says. “So if we see even more increase in that area it will impact a lot of things.”

The Big Picture

Construction firms are increasingly tracking material and labor costs as a way to anticipate cost hikes. Although the measurements vary depending on indiv-idual techniques and priorities, most show this region with relatively significant, though not disastrous cost hikes.

A study conducted by Associated Builders & Contractors Inc. indicated that Kansas City’s average increases were fourth highest among 13 comparable cities. St. Louis and Baltimore actually saw overall decreases in costs.

Kistler says labor is the one area most impacted by the local building boom, Kansas City increased at a rate 0.5 percent higher than the 13-city average over the last 12 months, the fifth highest of the 13 cities. In skilled labor costs, Kansas City far outpaced all 13 cities in the level of increase, 9.6 percent over the last 12 months. The 13-city average was an increase of 3.7 percent. Every city had an increase in skilled labor costs except Toronto.

Material cost increases varied widely because of spot shortages. Overall, Associated’s figures show Kansas City increased by 1.5 percent over the last

12 months, while the average of all the cities showed a decrease of 2.5 percent.

Roger Strickland, CEO of Strickland Construction Co., says the overall impact here might not be as dramatic as some of that sounds. “Primarily, it’s just general inflation, not at a rampant pace overall. But we just received word that we will be seeing a price increase (for steel framing) in the next 30 days, so that kind of thing is obviously part of the picture.”

Fogel says that in his company’s five-state region, Kansas City is in line with other areas. “We don’t see much difference from Oklahoma to Iowa. It doesn’t make much difference in this district where you work. We see more difference in daily price changes than in geographic ones.”

Paul Neidlein, business development manager for Turner Construction Com-pany, concurs. “Costs are fairly consistent across the Midwest. It’s the material increases that have the impact. Steel and copper have been in the news quite a bit. That’s going to affect everyone.”

Pennick says Dunn’s long-term findings for this area were also relatively modest. “When we looked at all of 2006, the average increase was about eight percent. Earlier in the year, we had some serious spikes and we were expecting worse by the end of the year. That showed us that you have to be careful not to over-react.”

For 2007, Dunn’s figures indicate another possible eight percent average increase in costs.

Neidlein says the Midwest is also gen- erally behind the East and West Coasts in terms of construction cost increases. “Their inflation tends to be a little higher. The Kansas City construction market is fairly active right now and that tends to make our inflationary index go up. But overall I think we tend to lag be-hind the two coasts.”

Turner Construction’s national cost index showed Kansas City construction cost increases between 2.5 and 4 percent through 2004, jumping to 5.5 percent in 2005 and 9.5 percent 2006.

Sometimes lagging behind the Coasts has additional advantages. Kansas City Group President Radd Way of Weitz Construction notes that when concrete costs began to soar on both coasts, his Midwest office began taking steps to avoid problems here as much as possible. “The fact that the Midwest often lags behind the Coasts helps us be proactive. If there are shortages appearing on the Coasts that can drive up the cost and delivery time, we can take action here in the Midwest before we feel the impact.”

Fogel says cost is not the only issue. “Labor is volatile throughout our five state region because there is a lot of work. But more than cost, the biggest thing we see is that it can be challenging to find good qualified labor. You can find bodies, but you can’t necessarily find the talent.”

Old Story

The history behind these economic trends is instructive. Pennick says large cost increases for steel in 2003 and 2004 were primarily attributed to massive purchases by China. Manufacturing bottlenecks, again worldwide, were another factor. “We are truly a global economy now. You’re looking at world and inter-national markets and it’s a whole new game.” Labor is less impacted by global or even regional forces, and trade agreements tend to soften or even eliminate such short-term spikes.

Some cost increases have unexpected results. “The increases in copper hit our electrical work,” Strickland explains. “That’s so valuable, you’ll see people stealing it. I’ve seen instances where it’s put in one day and gone the next.”

In some cases that danger warrants increased security, which becomes another cost. Often, however, the po-tential theft simply means scheduling changes. “You don’t put those things in until the building is secure,” Strickland says. “It’s the same with air conditioning units. You don’t leave a compressor sitting on the ground. It will walk way—there’s valuable scrap in those.”

Cost increases can also impact related products. “The original problems with steel dealt with the raw product and large shapes,” Way says. “Now we’re seeing some problems with by-products such as cast-iron piping, enclosures, light poles and other, more refined products. These manufactured steel products seem to be feeling the impact of steel prices now more than raw steel itself.”

Other cost fluctuations can be less dramatic, but still require action. Way says lumber prices are currently volatile, although some trends are downward. “When that happens, we’ll purchase things in bulk. We may buy a train-car load of framing if we see that it’s likely

to increase later.”

Pennick says Dunn often utilizes sim-ilar advance planning with clients. “We do try to get owners to purchase some materials early if we can access insured storage or we can make arrangements that we know will be secure,” he says. “Security is an issue with storage but many times there are options that make that practical.”

Fogel uses a similar strategy. “We try to convince clients that early commitment is a real advantage in cost of commodities like steel. We will begin to look even before plans and specs are done because that puts a cap on that particular area. It used to be you’d wait until plans and specs were done, then take competitive bids. Now, once plans are 90 percent complete, we’ll will go out and get competitive bids at today’s prices, instead of next month’s costs.”

Of course, there is a potential overall impact from widespread advance buying. Large-scale speculative purchases can ultimately help drive up prices.

Creative Thinking

“You have to be flexible,” Way says. “During the production bottleneck on cement, we used concrete from Mexico. It is good, but it does have some differences that required some different eng- ineering. But by doing that, we were able to move forward.”

Other concerns involve shortages—the inability to get a product or material at any price. “We have drywall shortages from time to time,” Meyer says. “But with the housing market down a little, that might actually help.”

Meyer also noted that labor issues vary significantly depending on the type of construction. Smaller projects are often not impacted by the same labor shortages that might affect Sprint Center, for example. “Other than the large public jobs, some construction is a little soft right now. There are a lot of subs looking for work. It’s not like 15 years ago—you can find people.”

One cost seldom mentioned is the cost of money—interest rates. Meyer noted that non-residential construction is affected by increased defaults on home loans that make banks nervous about construction in general. “Banks will say there’s a lot of money in the market, but I think they’re cautious about under writing,” he says. “Owners are telling us that there’s a lot more paper work in getting loans closed. That delays projects. I think we’re just going through a phase right now where they’re really doing their due diligence. It used to be a slam-dunk at four percent. Now they think harder and the rates are higher.”

Timing and scheduling is another major factor. Several builders indicated that they work with customers to reduce the time between biding and construction, while others spend more time on planning to wring out unnecessary costs.

“Understanding the design and preconstruction process is absolutely criti- cal,” Neidlein says. “You’re spending much more time in that phase. And if these factors make prices come in high, you go back and find cheaper ways to do it. We tell our clients they need to budget more time and more dollars up front.”

Cost-cutting steps include more than simply removing optional components or reducing the overall size of a project. “Really, what we’re trying to do

is sit down with the designers and the consultants and see what we can do to lower costs,” Neidlein says. “We find a true value. That takes a lot of time and a lot of grey matter in the room.”

Middle Ground

     Contractors can get caught between costs and customers if increases occur at the wrong time. Most devise some strategy to cap potential cost hikes for clients, without unduly exposing themselves to unforeseeable increases.

Strickland says his company’s contracts generally assure the customer of fixed costs once construction begins. “We do all we can…to lock in prices for the duration

of the project,” he explained. “As you can imagine, if the project lasts six months, you can somewhat predict what will happen. But something like the Sprint Center, that’s a two-year project and it’s much more difficult to predict what will happen.”

Way says subcontractors have in some cases limited their bid to a matter of hours because of product limitations. “We’ve come across situations where the electrical subcontractors will bid our project and you have 48 hours to give an answer. On most projects, you’ve normally got 30 days and sometimes even 60 days.

But those 48 hours are a clear indication of the volatility of the market. For us, the issue is finding a medium ground with the owner, who may not even tell us whether the contract is a go for 30 days.”

Builders have been doing this kind of forecasting for decades. “But expectations are higher these days,” Way says. “People have more demanding time frames and cost expectations. But construction has always been about risk management.”

Strickland agrees. “Construction is a difficult business because there are so many unknowns and variables. The better contractors just try to minimize the risks that come with those, by locking in prices and having the best estimates possible.”