Price hikes on material keep building costs high

More and more buildings are going up in Northern Colorado. So is the price to construct them.

A shortage of construction materials and resulting price increases have meant some Northern Colorado builders can’t construct buildings for the original contract price.

Prices for cement, steel, copper, gypsum and diesel fuel were on the rise before Hurricanes Katrina and Rita hit the Gulf Coast last fall. The natural disasters pushed prices up even more, and they haven’t gone back down.

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That has meant decreased profit margins for some Northern Colorado builders, while others have started including inflation in their contract negotiations with clients.

“So far we haven’t seen anyone pulling out of projects,´ said Johnny Walston, pre-construction operations manager for The Neenan Co., a Fort Collins-based company that builds schools and medical, commercial and office buildings. “But we have to pass the price increases onto the owner who will be buying the building.”

Hurricane impact

A year ago, the big news was the increasing price of steel, which went up about 10 percent a month for six to eight months, Walston said. Since then, the price of other materials has climbed, and many blame Mother Nature.

Hurricane Katrina fueled a cement shortage. An estimated 10 percent of the nation’s cement imports came through the port of New Orleans. The closure of cement plants nationwide also led to the shortage.

Since cement is a major ingredient for concrete, the shortage drove up concrete prices and resulted in rations last fall. Northern Colorado cement companies limited subcontractors to pouring concrete only a few days a week.

For Scott Renfroe, co-owner of Foundation Builders Inc., a Greeley-based concrete subcontracting company, that meant delayed jobs. The rationing has since relaxed, but prices have stayed high. Renfroe said prices increased 15 to18 percent last fall and haven’t gone back down. Concrete prices usually increase once a year, Renfroe said, but in 2005, they went up three times.

The same thing has happened to the cost of fuel, which remains above its pre-Katrina levels. In the construction industry, fuel prices have affected the cost of operating earth-moving equipment for excavation.

The China factor

China’s building boom has also had an impact on the shortages and price increases, Northern Colorado builders say.

“China has been building so much, they are sucking out all of the raw materials from the rest of the world,” Walston said.

Chinese government reforms in the past five years have caused an explosion in the construction industry. New businesses and homes have sprung up across the world’s most populous nation. Construction in Beijing is also booming in preparation for the 2008 Summer Olympics.

In 2005, investment in construction and factories in China grew 25.7 percent, or $1.1 trillion, according to a National Bureau of Statistics report released in January. However, the Chinese government has tried to curb such investments because of the strain increased production puts on transportation systems and the supply of raw materials.

Dealing with increases

In 2005, the rising cost of materials drove down Rust Construction Inc.’s profit margin. The Loveland-based company saw a 2 to 4 percent decrease in its profit margin over 2004, said Ed Rust, owner of the company, which builds 50 to 60 custom homes in Northern Colorado per year, most of them in the $400,000 to $600,000 range.

“Once we’ve signed a contract, we’re locked in,” Rust said. “If materials prices go up two weeks later, we don’t have the option to go back and raise the contract price.”

Rust said smaller companies like his have a hard time competing with large, national builders that can spread the price increases across projects nationwide.

“Last year was the worst year I’ve had in sales in the last 15 years,” he said. “It’s becoming tougher and tougher for the smaller builders to compete.”

The Neenan Co. has started including inflation into its contract negotiations, Walston said. The company has been the contractor for the Budweiser Events Center at The Ranch in Loveland, Poudre Valley Health System’s Harmony Campus in Fort Collins and the new Hospice of Larimer County’s Pathways building. It has recently focused its efforts on projects in other states, including Texas, Oregon, Washington and Arkansas.

Whether hurricanes or China are to blame, shortages and price increases ultimately end up on the shoulders of consumers. Rust, for example, goes back after finishing a house and readjusts the price for that model for future customers.

On the homes his company typically builds, the price has gone up $12,000 to $14,000 because of the rising cost of construction materials.

“It’s just becoming more expensive to build and to buy,” he said. “For the last year, these price increases have been nonstop, one material after another. And the thing is, the prices never do come down again.”