RAPIDLY RISING PRICES FOR CONSTRUCTION MATERIALS

Written by: Jerry R. Krusinski

The first half of 2006 saw a surge in the price of construction materials, causing building owners and their contractors to scramble in search of ways to trim costs, reports Krusinski Construction Company of Oak Brook, Ill. Overall, construction costs are probably 8 percent higher at mid-year than they were Jan. 1, with higher material prices accounting for the bulk of the increase, notes Jerry R. Krusinski, president of the firm.

To translate that increase into dollars, the cost of a typical office/warehouse building has risen by $2 per square foot, adding $200,000 to the final bill for a 100,000-square-foot facility. The impact on manufacturing facilities has been even more pronounced due to their larger inputs of electrical, plumbing and HVAC components.

The primary cause of the rise in material prices has been the escalating cost of raw materials, especially crude oil, copper and gypsum. Krusinski reports that bids for electrical work have increased as much as 15 percent in the last month, largely because of soaring prices for copper and other components used extensively in delivering electricity.

“Commodity prices have softened in recent weeks. Overall, however, growing worldwide demand for construction materials and energy resources are like to keep upward pressure on construction costs for some time to come,” said Krusinski. “Labor and insurance costs also have increased, but not at double-digit rates.”

In response, owners are pressing contractors to find less expensive ways to deliver the space they need.

“Our pre-construction managers, who do a lot of value engineering, are extremely busy right now,” said Krusinski. “They are looking at alternative materials for certain uses, as well as alternative sources for essential materials.”

With supplies of key materials stretched thin, another trend in the construction industry is early ordering.

“We are now ordering and taking delivery of materials much further in advance than we normally would, both to avoid future price increases and to make sure we have what we need when we need it,” said Krusinski. A case in point is steel fabrication, with lead times now stretching out to as much as 20 weeks on the heels of a 20 percent price increase that went into effect June 1.

Another result of the current inflationary environment of rising prices is a trend among owners to build less elaborate buildings.

“It’s a lot like buying a new car. If you can afford all the bells and whistles you’d like, then you order them, but if your budget it tight, you reduce the number of options you select,” Krusinski explained. “It’s the same with construction. Owners are accepting less expensive finishes and installing fewer windows, less insulation and fewer bathrooms. In a number of instances they are building only the amount of space they need today, rather than including space for future expansion.”

The 60 percent rise in crude oil prices during the last year has played a dual role in creating the current problems. It has dramatically increased the price of materials made with petroleum products. For example, asphalt prices have gone up $10 a ton in the last 45 days. At the same time, rising fuel prices have driven up the costs associated with shipping goods and with operating the diesel equipment used on construction sites.

“Our clients are certainly aware of these issues, and they understand that things are likely to get worse, in terms of prices and availability with a few of the raw materials, before they get better. As a result, we still continue to monitor, communicate and find alternative options to better manage these additional challenges for our clients so they can occupy the buildings according to their schedules,” Krusinski said.