A Material Problem

Construction Material Costs Continue to Increase as Infrastructure Funding Continues to Decline.

In a traditional Design-Bid-Build (DBB) scenario, one of the key factors affecting risk and project budget is the cost of construction materials. Once fairly easy to estimate, it is becoming increasingly difficult to predict long-range construction costs without a crystal ball because of the wildly fluctuating costs of construction materials. This is one of the factors driving the transition to alternative delivery systems such as Design-Build-Operate (DBO) and Concessions.

According to industry analysis conducted by the Federal Highway Administration, American Association of General Contractors, and the American Road and Transportation Builders Association (ARTBA), since 2003, prices for asphalt, concrete, steel, and lumber have “gone through the ceiling,” resulting in a Construction Cost Index (CCI) increase of approximately 59 percent from 147.8 to currently over 250. The table depicts price variations for four major construction materials over the past six years, and how those variations have impacted the CCI.

Click graphic above to view a larger version.

One of the single largest factors influencing the cost of construction materials is the rising cost of petroleum. Petroleum cost has a particularly significant impact on petroleum derivatives like asphalt. In 2003, petroleum was selling for $23 a barrel. By 2005, the price per barrel had more than doubled to $60. As of press time, petroleum prices are currently hovering around $100 per barrel. Accordingly, related pricing increases, not only for petroleum derivatives, but for associated costs such as the transportation of construction materials from source to site making the cost of all construction materials more expensive. Petroleum prices, however, are not the only factor influencing the rising cost of construction materials.

Dan Reagan, senior transportation group manager in Austin, Texas, explains that “Beginning in 2004, the four Florida hurricanes and Hurricanes Katrina and Rita in 2005, created so much infrastructure devastation that the increased demand for construction materials from these events alone would have caused significant price increases in the U.S. The recent fires on the West Coast will only add to that pressure.”

It’s not just national events that impact the price of key construction materials. World events also make a significant impact on material price escalations. According to the World Bank, China recently embarked on the Inner Mongolia Highway Project, which includes construction of the Laoyemiao-Jining highway (LJH) — a divided four-lane, access-controlled toll highway — which, as part of the national highway network, will connect the key industrial, administrative, and hub cities of Baotou, Hohhot, and Jining. China’s goal is to develop 52,000 miles of roadway by 2020 connecting all cities with populations over 200,000¹.

Meanwhile, the National Highways Authority of India was mandated in 2000 to implement the National Highways Development Project (NHDP), India’s largest ever highways project. The project, to be completed in phases over the next two decades, involves upgrading nearly 40,000 miles of highway that serve as the arterial network of the country with significant capacity and safety increases. The Cabinet Committee on Economic Affairs (CCEA) approved funding in 2006 for Phase VI of the project, which is still in progress.

Europe has also implemented the TEN-T plan to expand more than 10,000 miles of infrastructure. All of these large scope, multiyear projects fuel the demand for construction materials.

So what does all this mean to those in the construction and engineering community who are already paying more for the same amount of material? State and local governments, quasi-public entities, and even private entities are feeling the financial pinch and cutting back on construction work. Cutbacks can ultimately lead to fewer design, construction, and management jobs, causing an increase in competition as more companies scramble for fewer opportunities. It also means that those companies that are successful in securing work, will need to be more conscientious in controlling costs and finding innovative ways to fund projects when traditional funding is no longer available.

It’s not all gloom and doom, however. The recent downturn in the housing market and continuing slump in homebuilding are reducing the demand for materials such as lumber and concrete. As we continue to get closer to completing the rebuilding process in the wake of the 2004 and 2005 hurricanes, demand for construction materials will continue to decrease and prices should begin to stabilize. But the fact remains, as long as global demand outpaces the availability of resources, rising material prices will continue to plague the future of our infrastructure.

 

¹ARTBA "Critical Commerce Corridors," November 2007.