Public agencies have been reporting for more than a year that they are paying less for school buildings and other facilities than they had been. But few governments seem to have stepped up their construction programs to take advantage of the price breaks.
Montgomery County, Maryland, just outside of Washington, D.C., is an exception. "Montgomery County's government would get a $4 billion jolt over the next six years under a capital spending plan detailed Friday by County Executive Isiah Leggett," the Washington Post reported on January 16. "The proposal represents a nearly 7 percent boost in spending…With interest rates low and construction companies hungry for work, Montgomery officials said, the county should take advantage of the community's general affluence to press ahead with its capital priorities, especially those affecting education….Constructing a new Paint Branch [High School, which began this month], for example, is expected to cost $20 million to $30 million less than what was spent on a similar school that was built recently, schools officials said. The county can build an elementary school with the difference, they said."
An AGC survey of nearly 700 contractors, released on January 20, confirmed that the decline in building costs reflects more than a dip in materials prices. About 81 percent of the respondents said they cut profit margins for their 2009 bids, and 11 percent were willing to take a loss. That's a great opportunity for both public and private owners who are willing to act promptly. But most contractors cannot afford to operate at a loss for long. By later this year, contractors will either be out of business or charging more.
The drop in materials costs may soon run its course, as well. The producer price index (PPI) for inputs to construction industries, a weighted average of materials used in all types of projects plus items such as diesel fuel that are consumed during construction, rose 0.2 percent in December before seasonal adjustment and 0.4 percent from a year earlier, the Bureau of Labor Statistics (BLS) reported today. The December-to-December increase was the mildest since 1999, but December was also the first month since February that the construction PPI did not decline from year-ago levels.
Meanwhile, the PPI for new school building construction, which measures contractors' overhead and profit as well as materials costs, fell 2.4 percent from December 2008 to December 2009. That was the first 12-month drop since the index was introduced in 2006. In other words, contractors are still lowering their prices but are starting to pay more for the inputs they use - an unsustainable squeeze play.
Owners should take heed: the double delight of plentiful bidders and falling materials prices appears poised to end soon. If they want the most value for their construction dollar, now is the time to buy.
For more information, contact Ken Simonson at simonsonk@agc.org.
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