Falling materials prices, increased competition have led to lower overall construction costs
Business First of Louisville – by Kevin Eigelbach Staff Writer
There’s an unadvertised sale going on in the construction industry.
Normally, the winning bid for a construction project doesn’t fall below the engineer’s or architect’s estimate of what the project will cost. But that’s happening regularly now, said Dan Noonan, the chief estimator for Whittenberg Construction Co., 4774 Allmond Ave.
“Jobs are coming in at 25 to 30 percent under budget,” Noonan said.
According to Noonan, some clients can save millions on projects as a result of more-competitive bidding and falling prices for some construction materials.
For instance, Whittenberg bid in July on a project to build a campus recreation center at Morehead State University — a project the university budgeted at $26 million. Whittenberg bid $18.9 million, but Cincinnati-based Dugan & Meyers Construction Co. won the contract with a bid of $17.8 million, Noonan said.
“People are just trying to keep busy and keep the doors open,” Noonan said of his fellow contractors
A recent project to renovate the University of Louisville’s Kersey Library, which was budgeted for $6 million, attracted a low bid of $3.4 million and a high bid of $3.6 million, said John Brasch, president of Brasch-Barry General Contractors Inc., 901 Lampton St.
“If someone wanted to build a new building … probably the cheapest price they could get between now and eternity is today,” Brasch said.
Oversupply of contractors
The “sale” is happening because of two trends in construction. First, the cost of construction materials has fallen drastically, which means contractors can complete projects cheaper.
Second, there is an abundant supply of contractors who need work and are willing to work for less.Sixteen contractors bid on the University of Louisville project, which in normal times would have attracted about six, Brasch said. Early this year, his company went to a pre-bid meeting for a school construction project that attracted 25 general contractors.
“We returned the plans,” he said. “We’ve stopped bidding on public jobs for the time being.”
Preparing a bid takes a lot of time and effort, Brasch said. Most of the projects his company bids on cost from $1,000 to $5,000 just for the bid, he said, and only one bid in five, at best, are successful.
The same trend of too many contractors chasing too few jobs holds true nationally, said Kenneth Simonson, chief economist for the Associated General Contractors of America, an Arlington, Va.-based construction advocacy group.
“Where we used to see two or three bidders for a public job, now they tell me there are 20 or 30,” Simonson said. “And the winner will offer to do (the job) at cost.”
Lack of demand = cheap materials
The lack of demand for new construction also has caused the price of common building materials such as wood and steel to fall, which is another factor that makes it a good time to lock in bids on a construction project.
For example, the average price nationally for 1,000 board feet of the lumber used for framing structures was $238 on Aug. 14, compared with $282 a year earlier, according to Random Lengths, a Eugene, Ore.-based lumber-industry newsletter.
In March, the price fell as low as $195 per 1,000 board feet, which was the lowest price since February 1986, when the price was $187 per 1,000 board feet, associate editor Tim Cochran said.
The current price would look even worse, relative to historic prices, if it were adjusted for inflation, he said.
“Lumber is very inexpensive now,” said Chris Quinn, the executive vice president of the Louisville-based Kentucky Building Materials Association, 201 Townepark Circle, which represents suppliers of lumber and other building materials.
“If a person has the desire and the financial capability, now is an absolutely perfect time to build a house,” he said.Other construction materials also have dropped from a year ago. For example, copper futures were trading at $4 a pound in July 2008, which was an all-time record. But they fell to $2.50 per pound last month, Simonson said.The U.S. producer price index for materials and components for construction stood at 202.2 in June, a 2.1 percentage point drop from June 2008.
Simonson said he believes that overall, the cost of construction materials for 2009 will fall about 4 percent from what they were last year’s levels.
Normally, materials prices are lowest in the winter months, and they spike around March as customers get eager to start construction, Brasch said. But that spike didn’t happen this year until May, he said, and prices since have fallen back.
He is skeptical that the low prices will mean more construction projects, however.
“It’s like the stock market. If you study it, the time to buy is right now,” Brasch said.
“But only the really smart people do that,” he said. “The average Joe only wants to do that when the market is rocking and rolling.
“It’s the same with construction. They are doing it because they have a need, not because prices are cheap. When people are worried about what’s going to happen, they freeze things,” he said.
Situation growing dire
The sale prices for construction projects really are a limited-time offer, Simonson said, because prices could spike next year. And the recession could force many contractors out of business, which might make it less of a buyers’ market.
He has not heard of many general contractors going out of business yet, he said, but many still are finishing projects they began a year ago.
“The situation is getting increasingly dire,” he said. “There are signs of life in the single-family home-building market, but for the multiple-family and nonresidential, the downturn is continuing and even accelerating.”
From January through April, in terms of getting new contracts, business at Brasch-Barry was down about 75 percent from the same period last year, Brasch said.
The company laid off three office employees and six field employees, he said, the first layoffs in the company’s 20-year history.
Since May, however, the pace of attracting new business has picked up, he said, and the company has hired back one office employee and three of the field employees it laid off. The company now has nine office and 38 field employees, he said. This year, he expects revenue to be down about 30 percent from last year’s $44 million.
Revenue at Whittenberg also will be down this yea
r, Noonan said, but it’s hard to say by how much. Last year, the company billed $57 million worth of work, according to the Business First list of general contractors, which was published May 1. Noonan would not comment about whether the company had laid off anyone this year.
The original article can be found at http://louisville.bizjournals.com/louisville/stories/2009/08/24/focus1.html?b=1251086400^1963061&page=2