When steel and cement prices soared in 2004, Smith planned accordingly. He dug into his reserves and added $60 million to Clark County School District's $300 million building budget for 2005.
But as the next crop of schools goes to bid, Smith faces a fresh predicament: Even as material prices settle at new, higher levels, contractors buoyed by strong demand are continuing to raise their prices. Where a school used to attract seven or eight contractors, now there are one or two.
The surge in new building across the country is combining with higher prices for everything from copper wire to plastic PVC pipe to inflate the overall cost of construction. And over the long term, as thousands of experienced foremen, bricklayers and heavy-equipment operators start retiring, a shortage of skilled construction workers could materialize, driving up costs even more.
Spending on construction hit $1.05 trillion, its highest level ever, for the year ended in January. For the calendar year 2004, spending rose 9.2 percent, the biggest increase since 1996, the last time the construction industry emerged from a slump, according to Census Bureau figures. Hotels, manufacturing and telecommunications facilities showed particularly strong growth. Certain sectors that stayed stout through the slump — education, health care and residential — are expected to keep plowing ahead.
The net result is a 10.5 percent rise in the cost of constructing a building last year, the biggest increase since the inflation spikes of the early 1980s, according to RS Means, a Kingston, Mass., construction estimator.
Last year, prices of materials, especially steel, roiled projects that were still in the planning stages: If builders didn't either scale back or pump more money in, then contractors had to eat the increases. Prices for iron and steel products rose 35 percent last year, according to the Bureau of Labor Statistics. But some markets saw single-month increases that were double that, exacerbated by shortages and hoarding. Metal products, such as steel rebar and copper wire, shot up 60 percent in markets from California to Florida, while petroleum-derived materials, such as PVC pipe, rose 15 percent to 20 percent.
Material prices have leveled off since the fall, and steel shortages, which were endemic last year, have subsided. Still, materials now make up around 55 percent of the average cost to construct a building in the U.S., while labor takes up 45 percent. Before last year, it was 50-50, according to RS Means.
And now, on top of higher materials prices, builders are feeling emboldened by strong demand.
Organizations building everything from hospitals to bridges to office buildings are being pinched. The University of California, Irvine, had a 191-bed hospital on the boards when steel prices spiked last spring, raising the budgeted cost 20 percent. The hospital is going forward, but only after the architect, Hellmuth, Obata & Kassabaum, cut the cost by 10 percent through design changes such as a thriftier system of steel welds and reducing future flexibility in the operating room area. And the university added 10 percent more cash, bringing the cost to $371 million.
Generally speaking, the increases haven't prevented many projects from being built. But they have forced changes or delays, even in small projects. West of New Orleans, in St. John the Baptist Parish, La., the lowest bid for a senior center with a steel frame and roof came in at $1.2 million, $300,000 higher than expected.
The architect, Murray & Associates, replaced the steel trusses with wood beams and the metal roof with asphalt shingles. The new bids came in around $925,000 — close enough to push the project forward.
While hot markets such as Las Vegas and Southern California are bearing the brunt of the price increases, slower growth areas in the Midwest and East also are seeing building prices rise. The higher costs have so far had little impact on demand, which is driven more by low interest rates than higher costs, industry officials said.
