Hurricane Sticker Shock

Above: Whiteline Lofts, downtown Des Moines is a $20 million redevelopment of a 91 year-old warehouse building. Ryan provided infrastructure and sequencing recommendations to reduce costs and keep construction on schedule.

Residents of Whiteline Lofts probably won’t notice the modifications that saved builders half a million dollars…not unless they look through walls, floors and ceilings to see how the electrical wiring and the plumbing has been moved around, or peer at the project schedule.

“Ryan Companies US, Inc. came in and looked at our infrastructure and sequencing,” Jeff Schactner, one of the managing partners for the downtown Des Moines condominium structure, says of the firm that took over construction.

“The tenant or condo owner won’t notice, but by changing the way the plumbing and electrical work was done and resequencing some events, (when to pour concrete, for example), it kept the quality and made a world of difference.”

Builders throughout central Iowa will have to perform similar acrobatics over the next several months. Blame it largely on hurricane sticker shock. The damage wrought to the Gulf Coast late last summer by hurricanes Katrina, Rita and Wilma escalated prices of building necessities such as drywall, insulation, concrete, and especially lumber. An estimate for the U.S. Navy pegged the increase in material costs as high as 25 percent, labor costs at 15 percent, and equipment costs at 10 percent.

“For a 60,000-square-foot project like Whiteline Lofts,” says Doug Dieck, Ryan’s vice president of development, “the run-up could have added a million dollars to the cost of the project.”

What’s more, the storm-related closing of dozens of oil refineries in stricken Louisiana, Mississippi and Alabama hiked petroleum prices. “We saw it not only in the price of fuel, which boosted delivery costs,” Dieck says. “But anything that was petroleum- related was affected.”

Prices were rising even before the first hurricane struck, notes Tanner Kinzler, an officer of Kinzler Construction Services, Inc., of Ames, Iowa, and another Whiteline partner, but the storms were the clincher.

“It started out regionally,” Kinzler says, “but with the hurricanes, and the extension of the building season because of the mild start to winter in most places, it was kind of a perfect storm.”

Diesel fuel was the worst news, agrees Ken Simonson, chief economist of The Associated General Contractors of America (AGC), the nation’s leading construction trade association. “The producer price index for diesel jumped

59 percent from October 2004 to October 2005,” Simonson reports.

“That directly raises the cost of operating off-road equipment like tower cranes and bulldozers. Contractors also buy diesel fuel to run dump trucks, concrete mixers, and other vehicles. And, the truckers who deliver construction materials are passing through higher diesel costs in the form of fuel surcharges on most deliveries.”

Simonson also noted that the expected

25 percent increase in heating fuel this winter will keep the cost of natural gas high — and it’s already about 60 percent higher than a year ago. In addition, the hurricanes indefinitely shut down more than 100 gas processing plants on the Gulf Coast. This will boost prices on any material that depends on natural gas for production, including polyvinyl chloride (PVC) pipe, brick and glass.

In central Iowa, some in the construction industry are concerned that the increased costs may dampen the recent up-tick in construction. Others insist that the economy is strong enough to weather the weather. Still others are being stoic, saying all the industry can do is absorb the costs and do the best it can.

“Eighteen years in the business and I’ve never seen a price spike like this,” says Terry Gebard, a Des Moines-based architect. “Five million dollars is going to get you a little less building than you would have five years ago.”

Projects under construction already had cost bids out, reminds Mary Mason, a Johnston homebuilder. “I don’t raise an agreed-to price because my prices go up,” she asserts. “A contractor isn’t going to get a job if they do that.”

“But those projects still in the design stage are going to feel the full impact over the two to three months or so it takes to get ready to start building and the six months it takes to build. It doesn’t take much to affect the bottom line.”

Peter Brown, a commercial real estate consultant in Des Moines, says he hasn’t seen anyone pull the plug on a project. “But they could, if business was not expanding in conjunction with higher costs,” he says. “Fortunately, office employment continues to go up in the metro. Businesses are adding people.”

Others aren’t as optimistic. “It’s lightened up a little from what it was speculated at 30 days ago,” Kinzler acknowledges. “But prices continue to creep upwards. Demand is at capacity. Everyone has to carefully consider ordering and allocating enough product. It’s going to take active management in the industry.”

Paul Weeks, a commercial real estate broker and past president of the Iowa Commercial/Land Board of Realtors, agrees. “With land values increasing and escalating construction costs, people are going to have to take a closer look at what they can afford to take on,” he predicts.

Weeks recounted his experience with the Windsor Corporate Center in Johnston, which was contracted out to the Regency Commercial firm.

“There was a huge run-up in roofing materials as a direct result of Katrina,” Weeks says. “The contractors had to lessen the cost without affecting the quality or longevity.”

One solution is to preassemble some components such as piping or window walls and transport the put-together sections to the construction site. This saves on labor costs, since the assembling can be accomplished by workers who may be lower-paid than on-site labor. The drawback to this approach is that many of these preassembled sections are more massive and take larger trucks, (which use more fuel), to transport.

Another approach is to stockpile building materials, as Kinzler and other suppliers are doing, as a hedge against higher prices. The corollary to this approach is that the more you hoard, the scarcer the supply, and the higher prices rise.

But, a longer-term remedy may be the increased reliance on the design-build delivery concept. In this Swiss Army knife approach, an owner hires a construction team consisting of designer and contractors. Because one firm, rather than a series of subcontractors, handles all the construction, the various project elements are tightly integrated.

In addition, instead of different facets of construction sporting different price tags, the owner and the construction firm agree on an overall project budget. This contrasts with the traditional design-bid-build approach, where the owner employs an architect to design the project and then bids out the various stages to separate contractors.

An advantage to design-bid-build, is that an owner can turn a project over to contractors and leave it to them. This can result in a lower up-front cost. In addition, the process appeals to governments, which generally must award public works contracts to the lowest bidder.

But design-bid-build also can mean “contractor beware.” Writes Linc Moss, former president of the Modular Building Institute, “[I]f the architectural and engineering firm is not familiar with the building type or current construction cost, project pricing can quickly get out of hand, rendering a higher initial cost that may exceed the owner’s budget.” Some wags refer to design-bid-build as “design- bid-build-sue.”

In a design-build project, the owner has to play a more active role, but this is frequently overshadowed by the advantage of a holistic approach to construction:

Work can proceed in one phase while another is still in design or in some stage of progress. Communication is more evident, since everyone is aboard the same boat.

“In addition to communication and speed,” Moss writes, “costs are much easier to control in a design-build environment, since the designs are reflective of the construction means and methods of the contractor.”

Ryan’s Dieck, whose firm specializes in design-build delivery, says the method has provided more realistic expectations and has reduced haggling over costs and project delays. “When you get engaged in the concept and adapt as a team player,” he says, “it’s a great thing.”

While Iowa is one of only seven states that do not allow for design-build delivery in state financed projects, the concept is attracting an increasing proportion of private-sector jobs.

“Approximately 30 percent of the entire market is now design-build,”

Dieck says. “I expect that to go up to 80 or 90 percent within the next decade as the public sector continues to embrace the philosophy.” Examples of Ryan design-build projects include John Deere Credit in Johnston, Wells’ Dairy Blue Bunny in LeMars, Fareway Distribution in Boone, Sears Centre in Chicago, and US Bank Tower in Minneapolis. “Design-build will continue to grow in popularity,” Paul Weeks agrees. “People are getting busier and busier, and when problems invariably arise, they want one-source accountability,” the real estate broker says. “They don’t want finger-pointing and buck-passing. That is the key reason design-build makes sense. “

Kinzler says that as buildings become more complex to construct, a scientific method such as design-build will become increasingly necessary. “Up-front costs will become a big factor,” he says. “Banks are becoming more aware of those.”

Common sense solutions such as design-build will see savvy construction firms in central Iowa through these challenging times and those to come, those in the industry agree, especially since overall conditions are favorable. “There’s good demand for retail space, fairly good demand for office space,” says Peter Brown, the real estate consultant. “People are building speculative buildings — that’s a good indicator.”

Gebard, the architect, agrees that people aren’t panicking. “We have a level-headed group of folks in the Midwest,” he says. “Their response is reality. They understand that things are what they are. No one has put the brakes on a project.

Folks are still busy—very, very busy.”