Construction CostsConstruction Costs

Finance & Operations CommitteeFebruary 6, 2006

OUTLINEOUTLINE

Building Services ProcessBuilding Services ProcessEstimatingEstimatingConstruction EconomicsConstruction EconomicsFutureFuture

Building Services ProcessBuilding Services Process

No funds for “Improvements”No funds for “Improvements”–– Examples Examples –– copy machine, split a classroom, copy machine, split a classroom,

build time out room, playground equipmentbuild time out room, playground equipment–– Other funding sources must be identifiedOther funding sources must be identifiedPreliminary Cost Estimate Form available Preliminary Cost Estimate Form available http://www.madison.k12.wi.us/bldgsrvc/http://www.madison.k12.wi.us/bldgsrvc/Can not start design, permitting or Can not start design, permitting or construction until account number is construction until account number is established and purchase order approved.established and purchase order approved.

EstimatingEstimating

Referendum Projects Referendum Projects –––– Removed from website for adjustmentsRemoved from website for adjustments–– Scope Changes are largest cause for price Scope Changes are largest cause for price

difference.difference.–– We do not have resources to perform We do not have resources to perform

detailed engineering analysis on each detailed engineering analysis on each project, prior to implementation.project, prior to implementation.

Contracted Labor Contracted Labor –––– all estimated are based on contracted costs.all estimated are based on contracted costs.

EstimatingEstimating

Resources Resources –––– Means Cost Estimating Means Cost Estimating

GuideGuide–– Previous projectsPrevious projects–– ExperienceExperience

Estimating factorsEstimating factors

–– Time and resourcesTime and resources–– AsbestosAsbestos–– Changes in scopeChanges in scope–– Design, 8% to 10%Design, 8% to 10%–– Fees, permits Fees, permits –– ADA, 20%ADA, 20%–– Contingency, who pays change orders?Contingency, who pays change orders?–– Construction and construction labor are more Construction and construction labor are more

expensive than commonly thought.expensive than commonly thought.

EstimatingEstimating

Material prices have far exceeding Material prices have far exceeding standard inflationary numbers. standard inflationary numbers. 3% annual increase is no longer valid.3% annual increase is no longer valid.

Estimating Estimating

Construction EconomicsConstruction Economics

Major World Economic FactorsMajor World Economic Factors–– Katrina Katrina –– Hurricane Katrina disrupted labor Hurricane Katrina disrupted labor

and material markets, boosting inflation and and material markets, boosting inflation and sending oil prices above $70 barrel. Some sending oil prices above $70 barrel. Some analysts believe the markets will cope, but analysts believe the markets will cope, but estimators are padding escalation factors in estimators are padding escalation factors in bids.bids.

Construction EconomicsConstruction Economics

–– Midwest Drought Midwest Drought –– (ENR 10/26/05) (ENR 10/26/05) Drought over the upper Midwest this year may Drought over the upper Midwest this year may start drying up construction profits there next year. start drying up construction profits there next year. Even after receiving a brief reprieve of rain Even after receiving a brief reprieve of rain delivered by Hurricane Katrina, barge haulers on delivered by Hurricane Katrina, barge haulers on the upper Mississippi and Ohio Rivers continue to the upper Mississippi and Ohio Rivers continue to cope with low river levels that are limiting cope with low river levels that are limiting capacities of bulk loads of cement, aggregate, capacities of bulk loads of cement, aggregate, asphalt, steel and other building materials.asphalt, steel and other building materials.

Construction EconomicsConstruction Economics

Crude Oil Prices – Transportation, Petroleum products (roofing, PVC pipe), Shipping costsIn the past year, crude oil prices have risen significantly. From August 31, 2004 to August 31, 2005.– The price of a barrel of West Texas Intermediate

crude oil—a benchmark for international oil prices--rose almost 64 percent.

– During the same time period, average retail prices for regular gasoline increased approximately 40 percent, up to $2.61 per gallon.

– Despite the increase, Americans still pay significantly less for gasoline than those in many other countries.

1/23/06 - $70/barrel

Construction EconomicsConstruction EconomicsWorld FactorsWorld Factors

World energy demand is at an all-time high. – China, once an exporter of oil, has doubled its

oil imports in the last four years. – Demand in the Asia region as a whole, is

forecast to grow at a strong pace. – Overall, the United States consumes

approximately 25 percent of the world’s energy—which translates into one million dollars worth of energy every minute.

Construction EconomicsConstruction Economics

–– UnderinvestmentUnderinvestment -- After a decade, or more, After a decade, or more, of underinvestment in everything from of underinvestment in everything from refineries to oil field maintenance to refineries to oil field maintenance to engineering expertise, the global oil industry engineering expertise, the global oil industry isn't in any shape to increase production isn't in any shape to increase production overnightovernight..

For example, in the Persian Gulf nation of Qatar, For example, in the Persian Gulf nation of Qatar, Marathon OilMarathon Oil, , ConocoPhillipsConocoPhillips and and ChevronChevron have signed agreements to build three have signed agreements to build three natural gasnatural gas--toto--liquid fuel (GTL) plants to exploit that nation's huge liquid fuel (GTL) plants to exploit that nation's huge reserves of natural gas. But the projects were recently delayed reserves of natural gas. But the projects were recently delayed for at for at least three years because of a shortage of engineers to design tleast three years because of a shortage of engineers to design the he plants and because a shortage of construction materials had drivplants and because a shortage of construction materials had driven up en up costs. So much for the thirdcosts. So much for the third--largest natural gas reserves in the world largest natural gas reserves in the world providing a quick shot to global supply. providing a quick shot to global supply.

More UnderinvestmentMore UnderinvestmentThe inescapable conclusion is that this whole damn The inescapable conclusion is that this whole damn system is stretched tight from top to bottom system is stretched tight from top to bottom ---- all the all the past years of underinvestment are coming home to roost past years of underinvestment are coming home to roost at once, and the situation is being exacerbated by the at once, and the situation is being exacerbated by the petrodollar boom.petrodollar boom.–– We need more steel to build more equipment to dig more coal We need more steel to build more equipment to dig more coal

so we can feed new power stations, and so we can feed new power stations, and –– use the extra energy to mine and refine more copper, which use the extra energy to mine and refine more copper, which –– we need to wire new shipyards so we can launch more dredgers, we need to wire new shipyards so we can launch more dredgers,

so so –– we can improve port facilities, so we can improve port facilities, so –– we can move more iron ore to the expanded railways, so we can move more iron ore to the expanded railways, so –– we can make more steel. …we can make more steel. …MSN Money News, November “05MSN Money News, November “05

Construction EconomicsConstruction Economics

SAFETEASAFETEA--LU LU -- $286 Billion Highway bill, $286 Billion Highway bill, increases road and bridge construction by increases road and bridge construction by 38%. This will impact the prices on 38%. This will impact the prices on cement, steel, and labor.cement, steel, and labor.

Construction EconomicsConstruction EconomicsThree GorgesThree Gorges

–– When completed, the $27 billion Three When completed, the $27 billion Three Gorges Dam on the Yangtze will be the Gorges Dam on the Yangtze will be the largest hydroelectric dam in the world, largest hydroelectric dam in the world, and the larges engineering and and the larges engineering and construction project on the planet. It construction project on the planet. It spans nearly a mile across and towers spans nearly a mile across and towers 575 feet above the world’s third 575 feet above the world’s third longest river. Its reservoir stretches longest river. Its reservoir stretches over 350 miles upstream and forced over 350 miles upstream and forced the displacement of close to 2 million the displacement of close to 2 million people. Construction began in 1994 people. Construction began in 1994 and is scheduled for completion by and is scheduled for completion by 2009. The reservoir, its engineers say, 2009. The reservoir, its engineers say, will enable 10,000will enable 10,000--ton oceanton ocean--going going freighters to sail directly into the freighters to sail directly into the nation's interior for six months of each nation's interior for six months of each year, opening a region burgeoning with year, opening a region burgeoning with agricultural and manufactured agricultural and manufactured products. And the dam's hydropower products. And the dam's hydropower turbines are expected to create as turbines are expected to create as much electricity as 18 nuclear power much electricity as 18 nuclear power plants. plants.

–– When China buys When China buys metal, Lowell PTO metal, Lowell PTO gets upset. Why? gets upset. Why?

FutureFutureAssociated General Contractors (AGC) Reports Associated General Contractors (AGC) Reports –– How High is the Sky? The Outlook for Materials PricesHow High is the Sky? The Outlook for Materials Prices, Ken , Ken

simonson, Chief Economist AGC simonson, Chief Economist AGC –– “The popular one“The popular one--word word explanation for these increases is ‘China.’ India has matched explanation for these increases is ‘China.’ India has matched China’s 8China’s 8--10% growth rate, buying up far more resources 10% growth rate, buying up far more resources than it did a few years ago as it simultaneously industrializes,than it did a few years ago as it simultaneously industrializes,builds infrastructure, and develops an appetite for resource builds infrastructure, and develops an appetite for resource gobbling consumer products.”gobbling consumer products.”

–– ““The Cost Outlook for ConstructionThe Cost Outlook for Construction,” AGC, November 15, ,” AGC, November 15, 20052005

–– ““Documenting Changes in Construction CostsDocumenting Changes in Construction Costs,” AGC,” AGC

ENR ENR –– High material prices will remain, but inflation will High material prices will remain, but inflation will level off.level off.

FutureFuture

FutureFuture

Construction costs will continue to outpace Construction costs will continue to outpace inflation rates. How much is unknown.inflation rates. How much is unknown.District Impact:District Impact:–– 1999 Chavez $85/sqft1999 Chavez $85/sqft 2006 Linden Park 2006 Linden Park

estimate estimate -- $162/sqft.$162/sqft.–– Current economic factors indicate that we will Current economic factors indicate that we will

be unable to complete all of the items be unable to complete all of the items scheduled on the Maintenance List as scheduled on the Maintenance List as originally published.originally published.