Commodities Pricing

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Construction Costs Headed Up in ’12…But How Much?

March 30, 2012 in Commodities Pricing, Construction Trends | 2 comments

Economics of construction cost can be confounding at times.

Just when we think pricing should stabilize, it moves in the opposite direction.

Knowing the current cost for a project maybe painful, but it sure beats the alternative. This Construction Executive article summarizes the “why” behind the materials aspect. Factors impacting cost are:

*Supply/demand balance;

*The amount of speculation in futures markets;

*Changes in basic design parameters/building codes.

Depending on region and construction type, 2011 costs rose between 6% and 8%. This sounds large, I know, given the economy’s relative slow growth. While demand was still mostly slow, it’s the same thing we have heard for a few years: “global growth emerging nations.”

Specific to our market, I asked Charley Saunders, head of our estimating team, to give me his take. His thoughts:

  • There was a spike at the end of 2011 and the first 2 months of 2012, but things appear to be leveling off.
  • Steel has been particularly volatile.
  • New energy codes are coming into play and we are seeing price spikes in roofing, storefront and HVAC systems. These changes can be significant and should not to be overlooked in the pro forma.
  • Oil/gas prices are still inching upward which, if unchanged, will put upward pressure on pricing.
  • Some trades appear to be playing games with the specifications. We are paying close attention to scoping sub/vendor quotes to insure they are per plans and specs. We are not sure why, but this has been a issue recently.

How have prices changed in your area? What trends are you seeing?

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email


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In Construction, Are Bells and Whistles Worth Added Costs?

August 2, 2011 in Commodities Pricing, Construction Trends | No comments

In short, sometimes.

Last week, I was reading an article in Engineering News Record titled, “When Does It Pay to Use Innovative Concrete Construction Products?” The piece details a study by the Construction Industry Institute where three recent innovations in concrete were investigated, comparing them to traditional counterparts. The article explains the “why” behind their conclusions, but here’s the executive summary:

Modular formwork involves substantially more labor, which is usually cost prohibitive.

Self-consolidating concrete is a toss up. Labor costs are lower, but they might not offset the signifcantly higher material price.

High-strength rebar is a win over traditional steel enforcement.

I’ve been through several decades of innovations and can tell you that some have proven their worth and others are show.

For example, one of the challenges we have experienced in formed concrete work–especially the more complicated pieces–is the quantity of rebar in the design and getting concrete properly placed among this amount of rebar. Having less rebar makes this an easier task to accomplish properly.

As for high strength rebar, reducing the quantity of steel  involves less production and freight, leaving a smaller carbon footprint.

To me, there is never a large win in cost, sustainability or reduced carbon. The key is small wins multiplied many times over.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email

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Hot Gas Reheat: Worth the Extra Cost?

July 12, 2011 in Commodities Pricing, Construction Trends, Project Estimates | 1 comment

Last week, I was having a conversation about pricing on an HVAC system with Heath Cather in our office. Why had the mechanical engineer chosen hot gas reheat? It’s more expensive and sometimes unnecessary, I offered.

He mentioned a trend he’s noticed. With all the mold law suits lately, we are seeing recommendations for a sure bet against moisture: hot gas reheat.

What is hot gas re-heat?

With this system, you have two coils in the air handling unit. The air first travels across a cooling coil which de- humidifies, then it crosses the hot gas coil that raises the air temp back up 15-20 degrees to further dehumidify and render the air neutral, eliminating over-cooling.  Once the thermostat calls for cooling, the hot gas drops out in order to lower the space temp.

Why are we seeing more use of hot gas reheat?

I talked with a mechanical contractor relationship of ours for details. This is what he told me:

Recent requirements to introduce large amounts of outside air into the workplace can result in the rise of the  indoor humidity level in the space. People want to combat this by purchasing a unit with excessive cooling tonnage, a “bigger is better” mentality. The over-powered unit causes the system to short cycle, not running long enough to de-humidify. We’re left with excess moisture, which can lead to mold.

Thoughts on combating the moisture with hot gas reheat:

  • Energy code limits the use of electric re-heat to 42,000 btu and below.
  • With hot gas reheat, the average 5-ton unit sees a price increase between $2,800 and 3,000, rising significantly as the tonnage increases.
  • If the space is cooling, it is de-humidifying, whether humidistat is calling or not.
  • Humidity control from a properly sized unit can lead to energy savings. Lower humidity in summer will make you feel more comfortable at 75-77 degrees, while if the humidity is high , 70-71 degrees may not seem comfortable. The opposite is true for winter operation.

Takeaways:

Hot gas is more expensive. A standard  and properly sized system has been proven to be just as effective in humidity removal and comfort control.
Know what you’re building and communicate it. What will the building be used for, and are there special climate issues involved? This is another reason design build works for many clients.
Application is key. HVAC is not a one size fits all discipline.From a contractors stand point, we see the addition of hot gas reheat on the increase and the majority of the time justified.  However one should stop and evaluate: do we really need this, or is it just insurance for a 3rd party?

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email

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Looking Ahead at Construction Materials

April 6, 2011 in Commodities Pricing, Construction Trends, Projects, Recession | No comments

As the economy continues to improve, construction demand is slowly increasing. As a result, the demand for construction materials is also increasing and one has to assume those costs will continue to go up throughout 2011.

Recently, I was talking with one of our fabricators who supplies steel for projects throughout the nation and he told me he has seen more orders this year than in any of the past three years. He also said steel is going up nearly every day, be it because of demand or the futures market or scarcity of the product. This, of course, is impacting construction costs.

This got me to thinking about what the cost of other construction materials may look like going forward this year and into 2012. I did a little research, and here are my findings:

● Cement and Concrete: The Recession had a significant impact on this industry. Because of reduced demand, 14 cement plants closed in 2009 and several others suspended planned expansions. But after a flat 2010, demand is expected to rise 1.4 percent this year and 4.0 percent next year.

● Copper: Building construction accounts for nearly half of all copper consumption, and the demand today is far less than it was five years ago. Production is forecast to decline by 1.8 percent this year. But the demand should increase as the construction industry improves, which could result in copper shortfalls in 2012 and a spike in prices.

● Drywall: New residential construction accounts for half of all drywall consumption, and residential demand remains low. The price for gypsum, the primary component in drywall board, rose slightly in 2010 but began 2011 heading downward.

● Lumber: Prices dipped late last year, but we’re still up nearly 5 percent over 2009. Demand is not expected to increase significantly this year, however, as long as new residential construction remains flat.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email

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Raise Your Prices…And the Value You Provide

July 16, 2010 in Commodities Pricing | No comments

Our company likes a good bargain, and we are not alone. Entire organizations have been built using business models around the simple premise of selling products for less. With the economy continuing to lag, there remains considerable downward pressure on pricing.

I sometimes struggle with the notion that “cheaper is better.” We all know that’s not the case. More often than not, it’s about value for the dollar more so than the actual dollar figure. Can we provide more quality and value to our customers, making them more successful? Can that value give them the ability to survive even better in these times?

photo by speedM, Flickr

Think about a good steak, a fine bottle of wine or a comfortable pair of shoes. You usually get what you pay for. The same is true with performance and customer service. I feel if you treat customers fairly, and doing whatever is needed to get the job done correctly and on time, that can be more important than the bottom-line cost.

Make no mistake about it, I watch to keep our price in line with our competitors, but what we have always done is sell beyond the price. We sell value in our performance, which in turn helps our customers increase their bottom line.

I have found the following works for us in this regard:

● Communicate regularly with your customer relationships. The best way to learn how to improve your customer service is to make sure they feel good about the relationship.

● Shape your business to meet your customers’ needs and preferences. Ensure you are doing a better job than your competitors at satisfying the deliverables.

● Bring the price you charge in line with the value you provide. Quantify your services to figure out the tangible value they bring to the customers, and then set your pricing in line with that value.

Obviously, nobody wants to overpay for a product or service. But folks will pay extra for a good product and quality service if it helps them. With the right performance pricing, you can keep your customers happy and raise your revenue in the process (which will help feed and provide for your team in the process). Everyone wins.


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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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Construction Material Costs Are Defying the Laws of Economics: Why?

June 10, 2010 in Commodities Pricing, Construction Trends, Customer Relationships, Management, Project Estimates, Projects, Recession | No comments

The short answer: To me, nobody knows.

If we compare the normal demand for commercial projects in the United States to our current climate, the market is down 30-50 percent. The laws of supply and demand tell us commodities prices should decrease in order to level things out. The opposite is happening. On average, we are paying more for materials then we were last year. But why? Some may blame globalization, but I’m not so sure I agree.

I think it has more to do with manipulation of the futures market and the operation of hedge funds. These interfere with “normal” or what used to be a matter of supply and demand. In 2004 and 2005, steel prices rose 50-60 percent after being flat for many years. It got to the point that it was embarrassing. On long-term projects, I would have to go back to the owner and tell them of increased cost for no change in scope.

Then there was the asphalt. I remember being on vacation and meeting with someone from Wall Street. He was blaming rising prices on increased oil use in India and China, but I think this was faulty logic. Hedge funds and various other investment vehicles were driving the price of oil up.

The increases we have seen in the last two or three quarters are far less dramatic, but they do spike. It makes it really tough on our customers. During the last 12 months, average reduction in commercial construction has been in the 35 percent range. However, construction material prices rose almost 3 percent in February. Lumber went up nearly 8 percent in January and was almost 18 percent over the year before. All commodities including steel, copper and brass have increased while demand is decreasing substantially.

Now people are blaming China again. There are many myths about China and I am not sure what to believe. Their gross domestic product has increased while their energy consumption decreased. I’m just not sure how that can happen.

I will say over the last several weeks of bids, the prices have remained relatively benign, which is a good thing. Maybe we are getting back to core factors of supply and demand. I hope so, at least for a while—for our business, but more so for our customers.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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How to Spend Wisely When Choosing an HVAC System

January 28, 2010 in Commodities Pricing, Conservation, Management, Projects, Remodeling | 2 comments

HVAC (Heating, Ventilating and Air Conditioning) systems have evolved and gotten better with technology.  Matching system requirements with the need and with quality will always trump the bells and whistles. Over the years I have worked with a number of HVAC subcontractors and a few thoughts come to mind that might be useful:

SYSTEM ENERGY EFFICIENCY
Depending on the application and occupancy, a higher SEER (Seasonal Energy Efficiency Rating) for equipment is preferable most of the time. A higher the SEER means more expensive equipment, but the lower operating cost is a win for energy and your occupants.

SYSTEM MAINTENANCE
When selecting the right HVAC system, keep in mind the occupancy type vs. the long-term cost of maintenance. Chilled water/boiler systems will require preventive maintenance for a chiller, cooling tower, boiler, heat exchanger, etc to a greater extent than a DX (direct expansion) unitary system. A DX split or packaged system will be a handful of components that are readily available and replaced at a minimal cost.

INSTALLATION COST
Most of the HVAC system cost is in the equipment and control system. Both are important to system sustainability. Duct systems normally require little maintenance if quality materials, closure systems, sealants and higher “R” value insulation are used. Providing the correct type of air distribution is just as vital as selecting the equipment and will maximize coverage, eliminate the draft effect on occupants as well as air noise transmitted from the device due to a high velocity (fpm) of air.

BUILDING AUTOMATION
There’s a big debate over whether to use programmable thermostats or fully automated systems. Most projects perform well with proper zoning and programmable thermostats as opposed to extensive control systems that require increased up front cost and service for the life of the system.

Each control system has a place in the “right choice column.” A commercial building operating from 8 a.m. to 5 p.m. will have different needs than an institutional building or medical facility. The challenge with a fully automated system is it’s almost always proprietary in nature and can only be serviced by the brand vender, leaving the building owner with no other option for value shopping. A stand-alone zoned system with programmable thermostats is fairly user-friendly and can be serviced by any commercial company. This dramatically reduces long-term replacement and/or maintenance cost for the end user.

To me, when it is all said and done, you need a cost-efficient system that will deliver the performance and can be maintained without having to go to the banker every time a failure happens.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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Current Pricing Trends Are Good News for Construction Relationships, But How Long Can Costs Stay Down?

September 2, 2009 in Commodities Pricing, Customer Relationships, Project Estimates | No comments

SP_downward_trendBecause of the current imbalance of supply and demand in the commodities market, the cost of construction has been trending downward over the last year or so. Some of our projects take years to develop, and before this correction, the previous several years saw 3-4% increases annually. It’s hard to come back to your customer relationships and routinely share news of a bigger bill. The tables have now turned. The projects we bid a couple of years ago are costing less to finish than we anticipated. But how long can this continue?

I watch commodity prices every week, and over the last 60 days some have increased on the order of 30% or more. This will ultimately lead to higher building costs after supply balances with demand. I am not sure when that will change, but it will change.

I have mentioned to some of our customer relationships that I believe the next couple of quarters might be a good time to lock down pricing. Of course there is also a school of thought that there’s another shoe to drop with commercial real estate values. Who knows?

To make the best decision, it’s important to educate yourself. Among other newspapers, I try to read The Wall Street Journal daily. At the first of the year, it seemed like they published very few articles reporting positive news, but now the mix seems to be about 50/50. Lingling Wei and Peter Grant published an excellent article Monday regarding the commercial real estate sector, its relation to the economy as a whole and why the downward trend might stay a while.

As a practical example, I recently visited with a friend at the Sewanee: The University of the South. In the course of our conversation, she relayed her concern about the low pricing they received for a new project. The advice I gave her is the same I would I offer you. As a developer, if the contractor that submitted the price was qualified, proceed on but have a contingency to take care of those “misunderstandings” and change orders which will occur during these times. The low price you receive initially is just the beginning of the process. Be careful to keep a reserve in case our downward commodities trend starts moving back up.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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Trend in the Making: How the Economy Affects the Way We Bid

August 17, 2009 in Commodities Pricing, Project Estimates | No comments

SP-hairCut

We recently priced a pro ject in Atlanta (a little less than $1 million job), which had several general contractor bidders and a ton of subcontractor quotes. In fact, there were a total of 20 subcontractors competing for $70,000 worth of HVAC work. Amazing. What’s even more amazing is that our cost was exactly the same as the general contractor with the lowest price and we came

in second. The difference? The general contractor with the low bid put $0 for his overhead and profit. At first blush an owner may think that is a great deal, but in keeping with the laws of economics someone will eventually lose.

Something similar happened when we priced a project we are currently constructing in Richmond, VA. After being awarded the job, our sprinkler subcontractor said his price included reusing the old pipe, a new one for me in the industry. Everyone is looking for ways to get “low.” We are currently buying steel bar joist at the cost of the raw product—bar and angles. So basically we are getting the design cost, engineering cost, fabrication cost and the freight for free, as are our customers.

The recession has compelled many to find innovative ways to cut costs. Interesting times for sure.

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Merrill Stewart is Founder and President of the Stewart Perry Company, a commercial building contractor based in Birmingham, Ala. Contact him via email.

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