Cost Confusion

(As printed in the July issue of Colorado Construction magazine)

Volatile materials costs challenge Colorado’s preconstruction experts

A collapse in the housing market and the subprime crisis, along with reports of a weakening dollar, all directly correlate to a rise in construction materials costs, both locally and nationally. But overshadowing all of these events is a seemingly daily increase in the cost of crude oil that impacts every segment of the construction industry, especially preconstruction.
These global and national events are leaving materials costs difficult to gauge and will continue to do so through 2008, according to several economic indicators.
Although Colorado’s economy has not yet shown the same signs of recession as other regions, the rising cost of oil must be factored into nearly all project planning, according to James Vigesaa, owner of BleekerVigesaa General Contractors in Brighton.
“Construction costs being volatile certainly makes preconstruction more difficult,” he says. “And in that process we must focus on the cost of oil based on the current cost per barrel. However, projections like the possibility of oil reaching $150 per barrel by mid-summer has made it increasingly difficult to create accurate formulas for upcoming projects.
“Colorado seems to be on the complete opposite spectrum when it comes to economic recession than the rest of the nation,” Vigesaa adds. “And, if we want to see a leveling out of materials costs in relation to oil costs, we just better cross our fingers that oil has peaked.”
Although construction costs remain volatile globally, Colorado’s materials costs have seemingly leveled out-for now. In Denver, research from industry consultant Rider Levett Bucknall shows the first quarter experienced cost escalation of 1.2%, almost identical to that for the same period in 2007.
“Though our research does provide evidence of the continued trend towards lower quarterly escalation rates in many U.S. markets, record high crude oil prices in the first quarter of 2008 have somewhat lessened the effect of the falling cost of many construction materials associated with residential projects,” says Peter Knowles, executive vice president of RLB.
As residential construction spending slows due to a collapsing housing market, the demand for materials for products like concrete and drywall should cause costs to decrease, he says.
In Colorado, highway construction costs are greatly affected by higher crude oil prices, worsening the Colorado Department of Transportation’s 20% planned cut in its construction program for fiscal year 2009-a problem shared by many state DOTs across the country.
“Colorado is being impacted by two issues converging as part of a growing crisis: skyrocketing fuel prices resulting in higher transportation construction costs and declining funding for roadway improvements,” says Tom Peterson, executive director of the Colorado Asphalt Pavement Association.
RBL predicted that a gradual decrease in 2008 construction volumes from the historically high levels of previous years is anticipated to offer some relief on materials prices; however, it forecasts that 2008 construction spending will be subject to continued increases in cost escalation in the coming quarters, despite the current lower rates compared to previous years.

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