COVER STORY, JUNE 2006

THE COST OF CONSTRUCTION
Contractors stay on top of the game despite ever-increasing material and gas prices.
Lindsey Walker

Houston-based Tribble & Stephens is building The Mondrian, a 20-story, 146-unit multifamily high-rise located in the Uptown section of Dallas.

“Material costs have continued to rise at a steady pace, particularly during the last 2 years,” says James Herrington, president of Texarkana, Texas-based Southwest Contractors. “In spite of occasional downturns, the overall increases have been significant. Steel and concrete have been major contributors, but the cost for everything metal, including copper and aluminum wire, conduits and metal ducts, have also jumped dramatically.”

Van Martin, leader of Hoar Construction’s Texas office, also notes the price jumps. “With petrochemical products, it’s been impossible to guess what’s going to happen,” he says. “When people ask me what I think is going to happen with materials, I respond with ‘What do you think you’re going to be paying at the pump next week?’ Anything that has petrochemicals involved is a little bit of an unknown.”

So, how are contractors dealing with these unknowns when it comes to working with owners and developers? Communication is key.

“When we meet with a developer, we truly try to tell them what we expect to see in the next 3 to 6 months,” Martin says. “We work with them hand-in-glove to let them know what to allow for material price escalation and then we monitor everything, continually telling them how much steel is this week, how much it will be next week and so on.”

When working with the owners and developers, contractors must emphasize that, depending on how they estimated the job, the prices are very soft, according to James Stephens, president of Houston-based Tribble & Stephens.

“In addition, if an owner wants to try to have something budgeted and maintain that budget, they’ve got to move extremely fast and they’ve got to know what they’re doing,” he says. “The premium is on moving ahead, making a decision and knowing you’re going to do it. These owners are waiting long enough now that they get priced out of the market and have a tendency to drop their projects.”

Southwest Contractors is designing and building the 10,000-square-foot Advanced Cardiology of Texarkana facility in Texarkana, Texas.

“Owners and developers must work to negotiate the best land cost and financing terms,” he says. “Since contractors are traditionally only involved in the final leg of the process, they can expect pressure from owners and developers to keep construction costs low. Thin profit margins in this competitive environment will require the contractor to stay one step ahead of his competition or stay home.”

While communicating closely with the developers and owners helps to maintain the estimated budget, contractors must first shop materials and subcontractors for the best value, which doesn’t always translate to lowest price, according to Herrington.

“The lowest price is nice, but if they don’t perform on schedule or don’t pay their bills, I’m in trouble,” he says. “We emphasize the importance of cost control through site selection, purchase, financing, design and permitting. If costs are not effectively managed in these stages, there is only so much a contractor can do in the end to help ‘make the deal’.”

One positive way that the industry is changing is that contractors are starting to get involved earlier in the development process than in the past — meaning that they are better able to predict and manage costs.

“People rely more now on contractors than they used to,” Martin says. “They used to go to the architects and say ‘design to a budget.’ Now, they tend to come to the contractor early on and let us take the lead, tell them what the budget is and help them maintain it. We’re having more of an influence on projects.”

Another constructive change is the way technology is continuing to make the contractor’s job easier, more effective and more cost-efficient.

“We can do more with less,” Martin says. “There’s always a new estimating tool that comes out that helps you deal with the client during pre-construction. The tools that we’ve seen have helped project management as well as our estimating group. They have more tools and resources at their fingertips to develop a better product during the pre-construction phase. The better product that we can give early on the happier everybody is at the end of the day — when the project’s built and we delivered for that product.”

As Stephens notes, today’s technology also helps contractors to sort through building conflicts early on in the process.

“New imaging processes such as BIM (Building Imaging Modeling) allow us to pull out any conflict that needs to be resolved prior to getting out into the field,” Stephens says. “Any time you can resolve a conflict in the office around the table as opposed to the job site, you’re going to save a lot of money.”

In light of all that is changing in the construction industry, what should contractors expect in the coming years? Despite the obstacles of increased prices of gas and construction materials, Martin hopes to see an active, healthy marketplace.

“Right now, the market is hot,” Martin says. “It’s pretty busy anywhere and everywhere in the U.S. What I’m hoping for is a little more consistent, slow growth as opposed to these huge spikes we’ve been experiencing.”

Stephens expects to see more innovation and technology surface in the next 5 years.

“Capabilities will be put in more people’s hands, and 5 years from now, today’s new techniques will be as much a standard practice as anything we’re doing on our desks as far as automated estimating, planning and scheduling,” Stephens says. “This will also cut down a great deal on our paper usage. We keep talking about being a paperless society, but we have more paper today than we ever have. These new technologies may be what we need to get over that hump.”

Herrington also believes new innovation will guide the industry’s future.

“Increased costs will continue to drive innovation in the industry,” he says. “Those who design and those who build will achieve higher levels of efficiency with respect to new products and techniques.”

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