Special Report - November 2005

Materials Shortages to Continue into 2006

Whether or not a construction project will make money is always a roll of the dice. Recent spikes in materials prices and energy costs, with no real predictions of when the increases will slack off, are a bet that is starting to favor the house, instead of the contractor. Northwest Construction's special section looks at three factors: material availability, labor and energy and offers some predictions and solutions. For the latest information on the economic factors facing the industry be sure to attend our Best of 2005/2006 Outlook event December 6 at 7:30 a.m. at the Edgewater Hotel in Seattle. Hear Cliff Brewis Senior Director Editorial Operations West at McGraw-Hill give his predictions for what will affect the Northwest and what the most active markets will be.

This year's construction markets in the Pacific Northwest suffered constant ups and downs in materials pricing and demand. A similar scenario will ensue in 2006.

With construction well under way for the 2010 Olympics in Vancouver, B.C., major transportation projects planned and a heavy backlog of commercial projects contractors will continue to face revolving shortages of concrete, steel and lumber. The labor supply is also likely to tighten.

Rebuilding in New Orleans could possibly tap Northwest cement, steel and lumber supplies. However, Ken Simonson, chief economist at the Associated General Contractors of America, predicted that there would be little immediate demand in Gulf Coast areas, given the clean-up, rezoning and political questions to be solved before construction can start.

Lumber prices were impacted by Hurricane Katrina's devastation of the Gulf Coast in late summer, said Shawn Church, editor of Random Lengths, a Eugene-based publication that tracks the lumber market. "Wood panels went up $158 for 1,000 sq. to $499 in three weeks," he added. "That's a 38 percent increase. Lumber was more subdued at 13.5 percent."

Church said that none of the increased demand is due to orders from post-Katrina rebuilding, explaining "Demand is up temporarily because regional suppliers had kept inventories low due to oversupply of wood markets during the last five months."

"Suppliers had been confident to replace, but then Katrina knocked out pine mills and obliterated products and transportation and delivery costs are up," Church said. "So everybody jumps in at once for immediate supply. That pushes the mills back three, four, even five weeks. Every week they push their production schedule back, the price goes up."

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Concrete has followed the steel market with escalating costs due to heightened fuel costs in transportation and increased demand for the cement.

For projects about to start construction "we made pre-construction bids back in January," said Dan McTaggart, project manager for Ledcor Construction, Mercer Island, Wash. "Since then concrete has had a 50 percent increase. That's where we're getting the crap kicked out of us. You used to be able to forecast 3 to 5 percent escalation in materials costs with 5 to 7 percent contingency for the job and be within the ranges. Some of the owner's are starting to come around to that."

"We won a bid on fixed budget UW project in March," McTaggart said. "Now concrete's going to be up 15 percent by the end of the year, and that's over our initial 5 percent projection."

Cement shortages, especially in eastern Washington, have forced contractors to rethink schedules and rework project timelines.

"The residential side has really suffered from a shortage of cement," said Wayne Brokaw, executive director of the Inland Associated General Contractors of America, "If you can't pour your foundation, you can't build."

He said Inland AGC set in motion a push to open the border to importing cement manufactured in Mexico, but that Washington Gov. Christine Gregoire has not given her support to the plan, though nine other governors have.

Demand for cement is also up due in part to construction worldwide and tariffs on foreign products. In the past year, major construction has been under way due to building booms in China, the tsunami in Indonesia, the ongoing rebuilding in Iraq and the Vancouver Olympics close to home. And Katrina knocked out New Orleans, the number one port for foreign cement imports to the United States.

Regional demand for building materials has elevated as well. "Everyone who's been planning is pulling the trigger now," McTaggart said.

Pacific Northwest owners and contractors have found themselves doing a little creative problem solving.

Many contractors are adding clauses to contracts that build some flexibility into bids. Owners are getting to be more aware and building room into budgets to accommodate permitting and planning time, McTaggart and Brokaw, said in separate interviews.

Though green build systems can be prohibitive in cost, owners and contractors area also beginning to look at life-cycle costs, especially given recent energy prices. A recent evaluation of Portland State University's Epler Hall demonstrates how sustainable building can recoup initial expenditures. (See Northwest Construction, October 2005 issue.)

"There's definitely more interest in sustainable design," said Dennet Latham, a materials specifier at CH2M Hill. Or choose different materials. "If steel is high, then use concrete. The main factors are cost, availability and schedule."

Sustainable building practices not only stretch the life of the resource and the building, but of the relationships and process of building teams. "Even the building process has a sustainable philosophy" said Tom St. Louis of Green Depot, a manufacturer's rep and materials supplier, where designers, suppliers, owners and contractors meet early and often as in design build. "You work on educational resources and building science to improve designs."

St. Louis redefines the materials problem in terms of how builders use and preserve them. "Low bid gets the job, but it drives quality into the toilet in my opinion," said St. Louis. "The only thing that kind of saves us all in green building is that everyone's costs are on the table."

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