Nerves of Steel
Despite IncreasingPrices, ContractorsForge Ahead
By Diane M. Calabrese
General contractors and subcontractorsalike are dealing with a very complexproblem when it comes to how a job isestimated. For Parsons Electric, the recentprice increases in steel, copper, oil, and otherbuilding materials have made estimating areal challenge.
“Copper prices used to get all the attention in the materials-estimating portion of electrical contracting. Not so today,” says Jamie Allen, Purchasing Manager with Parsons. Steel prices have tripled since November 2003, and oil prices hit a 13-year high in October 2004. “Ironically, for our industry,” says Allen, “steel had not been as drastically affected by fluctuations, making it something of a predictable cost component until now. But that’s just one entity.”
Shrinking inventories are also making the estimating process more complex. Suppliers often hedge on oil and steel prices by carrying reduced inventories. Contractors must then pay more for those materials and wait longer for delivery. Estimates for new construction jobs end up being higher, and many jobs in progress require rethinking.
A Serious Commitment
Parsons works with clients to get the most from every dollar, even in the toughest economic environment. Staying within budget is a commitment the company takes seriously. Parsons sees the process of generating an estimate as a good opportunity to talk with a client about the hidden cost factors that creep into every construction project. Since Parsons works with clients across commercial, industrial, institutional, and health-care sectors, the overall understanding about material price fluctuations among its clients ranges from general to sophisticated.
“The goal of Parsons is to make sure the client and contractor start on the same page and move forward together,” explains Allen. “On private projects, we work with our clients to ensure they understand we are working in an unpredictable environment. We try to limit the project’s exposure to material price escalation. Unfortunately, when you’re dealing with publicly funded projects, it’s a hard bid process with little to no negotiation. That can be difficult.”
Cause and Effect
Why all the uncertainty about material pricing? The factors are varied. The global demand for oil is at an all-time high. Competition for what is a finite amount of this resource can be fierce. “Many people forget that petroleum plays a big role in the production of many electrical construction materials, such as PVC and electrical wire,” comments Allen. “When oil prices spike, so does the cost to produce these materials. Fuel prices also drive up the cost to transport them across highways and sea routes.”
Another factor contributing to high construction estimates is a high demand and short supply of steel. Currently, China and India are experiencing rapid growth, and their demand for building materials, such as steel, rivals that of the U.S. Unfortunately, the majority of U.S. steel mills have closed in the last 15 years due to their inability to compete with the price of imported steel. Tariffs on imported steel have come and gone, and buyers outnumber sellers in the world market.
It is often difficult to get steel at any price. Meps International, Ltd., a leading supplier of steel price information based in south Yorkshire, England, tabulated the increase in steel prices between summer 2003 and April 2004 at 68 percent. By October 2004, most buyers were paying over $700 per ton.
Even global conflicts affect the price and availability of these materials. Tasks, such as rebuilding Iraq, tax the supply side of the equation, as the electrical infrastructure there receives special attention and consumes large amounts of steel and copper. Conflict fosters uncertainty, and it motivates manufacturers to get as much as they can now for what they have to sell. Cultivating long-term relationships with their buyers is not a priority.
Sticker Shock
The more clients understand the factors influencing world market prices for commodities, the easier it is to get past any “sticker shock” on a construction estimate and focus on getting the best outcome on a project. Parsons responds to questions with a straightforward attitude and provides information that enables clients to make an informed decision about estimates.
The Parsons approach is to plan for the best and prepare for the worst. “Looking reality in the eye is often the best way to deal with it,” says Allen. “Steel prices have now started to level off and even go down a little. Our estimating software is updated every two weeks or as needed, but it is an unpredictable market right now. That is the nature of this business at times.”
