VOL. 124 | NO. 177 | Wednesday, September 9, 2009
Sunken Economy Boosts Public Construction Projects
GEOFF MULVIHILL | Associated Press Writer
MOUNT LAUREL, N.J. (AP) - Public construction projects, usually an exercise in cost overruns, are getting cheaper as material prices fall and builders compete for contracts just to stay afloat, a silver lining for cash-strapped governments but a worry to some contractors who risk lowballing themselves out of business.
Every state this year reported average winning bids coming in from 5 to 12 percent below estimate, said Tony Dorsey, spokesman for the American Association of State Highway and Transportation Officials, whose organization polled state governments this year on the first round of projects funded by the federal economic stimulus.
"It's a global economic downturn and it has a far-reaching impact, and that has caused prices to go down for everything," Dorsey said. "That has also helped to fuel these lower bids."
In New Jersey, where for a decade efforts to replace schools in the state's poorest cities have routinely run over budget, the Schools Development Authority has noticed an even sharper drop in costs. The four contracts awarded this year to build schools have ranged 15 to 39 percent below the estimates by state engineers. That compares with $6 billion allocated in 2000 going faster and building fewer schools than anyone expected.
One reason for the lower bids is that prices of construction materials have been falling. The federal Bureau of Labor Statistics reported the price of steel and iron scrap fell nearly 57 percent from June 2008 to June 2009, and cement prices were down 15 percent over that period.
Jim Andoga, president of the Irving, Texas-based construction giant Austin Bridge & Road, said he was making bids a year ago that included paying 65 cents per pound for rebar used in concrete work. Now, he said, the same material costs him 26 cents per pound.
The falling bids go beyond materials.
Andoga said his company, facing more competition, has reduced built-in profit margins in its bids by about 20 to 25 percent over the past year. In 2006, he bid an average of 9 percent over engineers' estimates, compared with 17 percent under this year – and still has not won as often.
"Contractors that don't have long-term work saw their backlog drop so dramatically, they started sharpening their pencils," he said. They needed to get any work to stay in business – even if it means losing money on some deals.
He predicted that the risky bids could cause contractors, especially smaller ones, to fail.
Jeffrey Solsby, a spokesman for the American Road & Transportation Builders Association, said government contracts, especially, have become more competitive for his members as they have looked for any work after jobs in sectors like homebuilding dried up.
Jonathan Dean, spokesman for Baltimore-Washington Thurgood Marshall International Airport, said the airport has been getting more bids lately for jobs including reconstructing aprons. In the highly specialized airport construction world, he said, companies are willing to travel farther to get work as it becomes scarcer.
It remains to be seen how much tax and toll revenue can be stretched because of the smaller-than-expected contracts. Many agencies responsible for big construction contracts – such as highway departments – use dedicated revenue streams, so the savings cannot go to pay for other functions of government, such as keeping social service agencies afloat.
Kris Kolluri, the CEO of New Jersey's school-building authority, said he won't promise that the cost saving will equal more schools than the state is already planning, for now. The project he heads has a history of management oversight problems and real estate and construction costs that can fluctuate quickly. So he's routing the savings into a contingency fund.
"There's a cautious lesson, which is the market is volatile," he said. "The prices could be going through the roof within a matter of months."
Kolluri should know. Just over a year ago, when he was the state transportation secretary, he announced the state had to scale back repaving plans because costs were rising so fast.
Now, governments are using their savings to do more road work.
"They're pumping it back into more projects," said Dorsey, of the highway and transportation officials group. "They're adding projects, they're expanding projects."
The California Department of Transportation used to update project estimates yearly. But now, bids are dropping so quickly that engineers are redoing estimates four times a year.
In Kentucky, a $34 million contract was recently awarded for a job estimated at $39 million to relocate the U.S. 60 bypass near Owensboro, giving the state money for additional work.
But state Transportation Cabinet spokesman Chuck Wolfe said there are still more needs than funds.
That's always the case, but he said it's been worse during the recession because the main sources of revenue for road work – taxes from vehicle and fuel sales – have been down.
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