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Construction Costs: Is Your School Project at Risk?

Any dinner-table economist knows hurricanes Katrina and Rita will impact school construction costs.

Michael Garretson, deputy superintendent of the Broward County School District in Ft. Lauderdale, Fla., was still reeling from the 2004 hurricane season when four storms struck his state in quick succession. Thanks to the construction demand the winds whipped up, materials that rose between 8 percent and 10 percent nationwide cost him between 12 percent and 14 percent more. That's a 1 percent increase a month--or an additional $8 million on his $60 million plan to build four elementary schools.

"We thought we'd see a steep spike and then it would flatten out," Garretson says. Instead, hurricanes Katrina and Rita ripped into the Gulf Coast, and Garretson fielded a 12 percent increase on lumber alone in November 2005. "We are really having a tough time," he says.

Forget steel
"I would be
more concerned
about gypsum
and cement."
-Robert A. Murray,
McGraw Hill Construction

Broward County board members have agreed to reopen the five-year, $2.9 billion construction plan approved just days ahead of the hurricane emergencies. Meanwhile, administrators in charge of school construction nationwide are clutching their calculators in fear, waiting for the other shoe to drop.

But just how bad will it be?

A Rocky Foundation

It's not as if construction costs were stable before Katrina went ashore in New Orleans on August 29. The education sector dubbed steel the number one price increase culprit in 2004--a situation that didn't peak until February 2005. It helped contribute to the fact that the cost to construct a building in the United States rose 10.5 percent last year, the biggest jump in nearly 25 years, say officials at RS Means, a construction estimator in Kingston, Mass. By the end of August, however, the wholesale price of steel had slid 13.2 percent, according to Robert A. Murray, vice president of economic affairs for New York-based McGraw Hill Construction.

So any steel price increases, he predicts, will be temporary, with prices then stabilizing--perhaps even declining again. In fact, steel suppliers reported to Ken Simonson, chief economist at the Associated General Contractors of America in mid-September that anticipated steel hikes on Oct. 1 had already been trimmed from between $30 and $40 a ton to just $20 a ton.

"I would be more concerned about gypsum and cement," Murray says flatly. After all, gypsum's prices have shot up 9.9 percent since February 2005 and cement is up 5.6 percent, when you can get it at all. Manufacturers were warning of a short supply in 32 states long before Hurricane Katrina became a household name. That pressure, of course, would ease if the federal powers carve out a deal to drop the 55 percent duty on Mexican cement.

Bruce Risley, vice president of PinnacleOne's California program and project management group, also anticipates higher prices for drywall, glazing, electrical components and lumber. Only the latter may offer schools a break in Murray's predictions--softwood lumber prices in August 2005 clocked in at 15.5 percent below their levels in 2004, while plywood prices were virtually on sale with a 13 percent drop. The immediate lumber cost spikes construction managers saw on their invoices were due to the fact Katrina shut down 22 lumber mills--and as long as they come back on line within months, McGraw Hill's analyst doesn't see the overall price of lumber rising dramatically.

John Petrashek, director of new construction for Pasco County Schools in Land O' Lakes, Fla., would embrace that news. Currently, his correspondence with suppliers only brings bad news: using phrases like "act of God," the companies on board to deliver the goods for his 23 new schools by 2009 schedule (seven schools are currently slated to open in 2006-'07) are declaring they can no longer be held responsible for holding the price that was negotiated or delivering the material on the schedule they contracted to.

From a PVC pipe manufacturer, he reads, "A fuel surcharge will be implemented. There will be no new customers until further notice. That all and new existing orders will be reviewed and subject to potential cancellations or price adjustments even though it was a set price." It's the same with roofing materials, insulation and copper, he adds.

"The impacts are all negative. We're not seeing a single positive," Petrashek notes. Yet it's still too soon to announce whether these hurricanes have blown the district off track. "Construction managers are optimistic and doing the best they can," he says with a shrug.

Finally there is a phenomenon brewing that, to date, has only risen to the level of a rumor in Risley's circles. "I can't validate it, but I've heard rumblings that a lot of suppliers will sit on materials, waiting for prices to escalate so they can make a handsome profit on current supplies," he explains. "If that idea catches on, it will start an artificial increase in prices. Of course, the dam will break at some point and prices will start tumbling," is his only comforting outlook.

Overall, Risley's crystal ball guesses that construction costs will rise somewhere in the 10 percent to 20 percent range over the next 12 to 14 months, with the impacts resonating for a good two years. And this is for a niche that was already taking a beating: PinnacleOne's reports show prior to the hurricane season, the educational sector saw the highest average price increase in project bidding at 14.1 percent, more than four times the rate of inflation in 2004. Sixty percent of school districts reported average price jumps of 10 percent or more, with 32 percent seeing increase averages more than 15 percent and 21 percent were whopped with an average bid price that rose more than 20 percent.

"The bigger districts with more projects on their plates can make the cuts a bit less obvious," says Risley. ""It doesn't draw the same kind of attention as a small program that was building two or three new schools and has to cut."

That's scant comfort to Dale Scheideman, AIA, director of new schools and facility planning for Las Vegas' Clark County School District, as he sits in the hot seat to open a new school a month for the next two years. Luckily, all of his contracts for 2006 openings were awarded before Katrina, so he has yet to see a price impact. "But we're being told to prepare for an escalation in materials and labor costs--and they've already gone up 35 percent over the last 18 months," he says. "We are really concerned about projects opening in January and February--and concerned is the operative word."

Labor Costs

Rocky gasoline prices grab headlines, but according to Paul Abramson, president of Stanton Leggett and Associates, a Harrison, N.Y., consulting firm, there is news that affects consumers more seriously than construction. The real side effect that makes him and colleagues cringe is labor. Simonson's figures show that two weeks before Katrina hit the Gulf Coast, Louisiana had 117,000 construction employees while Mississippi had 51,000--up 3 percent in both states from August '04 levels, and less than the 4 percent rise nationally.

The possibility discourages Garretson, who wrestles with extraneous circumstances: Thanks to the Jessica Lunsford Act passed September 1, Florida now requires anyone who works on a school site be fingerprinted and submit to a class 2 background investigation. "A third to half of our labor market are illegal aliens--it's just a fact of life down here--and they won't go in to be fingerprinted," he says. Consequently, he's watched the 5,000- to 10,000-person average workforce he needs at any given time shrink to a mere 1,300.

"The country is
on the look-out,
but meanwhile,
construction is
at an all-time
-Barbara Worth,
The Council of Educational
Facility Planners

Overall, Risley sees most of the labor drain coming from the Midwestern states and those surrounding the damaged areas. Labor will be drawn from Texas to the west, Georgia and Florida to the east, and Kentucky and Tennessee to the north, he notes. "The coasts, where things are pretty much prevailing wage anyway, we don't expect as much," he adds.

But combine this development with the rising costs, and it's no wonder a contractor on a middle school just informed Garretson that the projected time line has shot from 20 months to 26 months.

To add insult to injury, Broward County can't even buy portables to address any future shortages of classrooms the slowdown cause--space needed to comply with Florida's constitutional amendment to reduce class sizes by two students per year until it reaches no more than 18 per classroom in elementary, 22 in middle school and 25 in high school by 2010. That's because portables, too, are scattered across the hard-hit Gulf. Garretson's current order for 100 units is on hold.

Meanwhile, Petrashek ran into snags because the government permitting agencies are swamped and struggling to keep up with the rising demand. He's personally experienced delays between two and three months from this angle.

Yet the bottom line remains hazy for Murray. "What usually happens in any price increase situation is that as prices rise, producers put additional capacity on line so prices ultimately level off and come back down, but not for several quarters," he says. "I'd say we're looking at high prices at least through the first half of 2006. But this is more of a blip and a rough patch to work through."

Warnings or Speculation?

Buck up speeches notwithstanding, experts like Abramson are far from convinced these dire predictions will bear out. Time is literally on the side of his clients in New Jersey, Connecticut and Pennsylvania. "Many of the Gulf districts, New Orleans being the obvious example, have no planning departments. The state of Louisiana has no education planning department. So there are a lot of kids sitting out there but I'm very doubtful a lot of construction will get underway very quickly," he explains. "I'm working in school districts with three and four construction projects underway right now, and the hurricanes aren't a factor."

Even Petrashek admits that most of the negative notes crossing his desk are anticipatory--actual resources have yet to be required of neighboring Florida. "They're still in the pumping and drying out stage in New Orleans. They have to go through the design stage. In six to eight months, I'm guessing, we will start to see resources being diverted from our area," he says.

Nor does the labor situation faze Abramson. "Halliburton will rush its people in from Texas and Mexico. They won't bother taking union people from New York or New Jersey--they won't pay that kind of money. Indeed, Scheideman reasons, laborers in Las Vegas should stick around the valley--but only because the casino building market attracts top salaries in the first place, a fact he has competed with from Day One.

"I just don't see the hurricanes as a very major effect," Abramson repeats. He has a friend in Barbara Worth, associate executive director of The Council of Educational Facility Planners. She agrees school districts have yet to feel the impact--an impact that could peter out before it arrives.

"As far as shipping costs and things like that, economists predicted Katrina would add tremendously, and today it doesn't seem to be the problem they thought it would be," she points out. "The country is on the look-out, but meanwhile, school construction is at an all-time high."

Indeed, although he sees his contingency monies melting away daily, Clark County's Scheideman remains upbeat on the possibilities. "The bulk of our materials come from the West. We might not be hit as hard as people east of the Rocky Mountains. So we're full steam ahead. Frankly, we have our fingers crossed for New Orleans and us."

Julie Sturgeon is a contributing editor.