Steel Prices Impact Construction

May 7, 2004
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GRAND RAPIDS — Area contractors, faced with growing steel prices and surcharge threats, are investigating alternative methods of design and customer service to survive the rising costs.

Steel accounts for as much as 40 percent of a building contractor’s finished product, including not just erectors but a long list of other components including wall studs, fire-protection piping, steel-reinforced concrete and objects like doors and window frames.

Although shaped steel products haven’t risen in price quite as dramatically as sheet steel, the price inflation is still alarming.

According to April 29 steel prices provided by Tom Stundza at Purchasing Magazine, wide-flange structural beams have risen in price from $305 a ton last year to $558 last month, concrete reinforcing bar $310 per ton to $420, and low-carbon wire rod from $300 to $495.

On top of that, delays are an ever-present reality, with 24 percent of the nation’s steel mills reporting lead times of more than 20 weeks.

Earlier this year one of the nation’s largest contractors, Havens Steel Co., was forced into Chapter 11 reorganization as a result of the rising costs. Haven’s was ruined by several massive fixed-cost projects, including the new Miami International Airport.  

The first adaptation that local contractors have had to master is the bid process itself.

“Our contractors will put in a bid for a job, but they won’t be able to award it for 60 days,” explained Roy Lorenz, vice-president of subcontractor Steel Supply. “Because in 60 days you don’t know how much you’ll be paying for material.”

“We’ve had to add exceptions in our proposal that the bids are only good for a certain amount of days,” said Chris Veneklasen of A.J. Veneklasen Inc.

“What we find ourselves doing is informing the customers more,” Michael Kelly of Wolverine Building Group explained.

“Get them to make decisions sooner, so that we can get orders placed into the system as quickly as we can. We’re even hedging our bets on some that we’re not 100 percent certain of. We won’t have a signed contract yet, but we’ll place orders so that as they do become a project, we’re in a position to react in a timely manner.”

In the past, a contractor would order materials by a methodical process. First the foundation would be poured, then the steel structure would be erected, then later piping and wiring were channeled through the building, and then dry wall and so forth.

Companies were able to order the materials in the order in which they were needed.

“Now you get a contract and if you haven’t already placed the order, you’re looking at a lot of those items thinking, ‘What are the biggest steel items being used in this project?’” Kelly said. “You make those the priority to order first.”

Although its installation is not found until later in the building process, one of the first items a contractor might seek out is tube steel, the piping used for fire protection purposes.

“Prices have gone through the roof on that stuff,” Kelly said. “You lock in with those guys first.”

“Tube steel is the most expensive steel product right now,” Dan LaMore from The Cristman Co. agreed.

“Tube steel has skyrocketed. If someone could come up with a method of using a different product other than tube steel, such as a wide-flange beam maybe …”

The best solution may turn out to lie not with the contractor that is able to most efficiently use steel but with the one who uses it least, according to LaMore and several local contractors.

“We’ve been looking at design alternatives to help offset this problem,” he said.

Like Cristman many area builders are seeking out alternative building materials.

“Steel has always been the best choice for the cost,” Veneklasen said. “But with the volatility of it right now, I think everybody in the marketplace is looking for alternatives that will accomplish the same goal with a more affordable price.”

Some designs are addressing the concerns in the structure itself. Instead of immediately assuming that steel beams are the most affordable option, designers are more likely to explore masonry as a viable option. Where once concrete block or poured cement wall-support was much less cost-effective, now that is not always the case.

Certain situations used to require the use of the more expensive precast concrete walls or floors; generally these involved height restrictions. The use of a steel beam adds at least two feet to the height of a building, while concrete allows a building to be much lower.

In recent times, the slower masonry process nonetheless has still allowed buildings to go up more quickly than the use of a steel structure.

With steel delivery times sometimes measured in months, masonry is immediately available. Some contractors will choose masonry for this reason even if there is little or no cost savings.

“Precast used to have a net impact on a building of 5 to 10 percent,” Veneklasen said. “Now with steel being up 5 to 10 percent — 20 to 30 (percent) depending on what aspect you’re using — it’s affordable to use alternative methods and materials.”

Wolverine has one project that does away with the steel structure entirely, using concrete exterior wall panels and building columns, with the roof structure resting on top of precast concrete wall panels.

“Of course, the problem with that is that block has steel in it too,” Veneklasen added. “It’s sort of a catch-22.”

Kevin Brown of Michigan Certified Concrete Products hasn’t seen a significant sales jump yet, but he expects it.

“It takes awhile in the commercial industry to go from drawing to finished product,” he said. “We expect it to go up and help us out a bit. But the other situation happening in the market is that cement prices are going up as well.”

In April, cement prices took a jump for the first time in years.

Another increase is anticipated for August, also due to the growth of the Pacific Rim. Likewise, wood and other alternative materials are seeing similar increases — not anything as dramatic as the skyrocketing steel prices, but increases nonetheless.

“I think these prices are here to stay,” Kelly admitted. “I don’t think this is just a blip on the radar screen. But it’s an opportunity for people to come up with something new and exciting that’s more economical than steel and offers a quicker turnaround in how long it takes a builder to put up.”

Russ Hinkel of Design Plus warns against design changes, however.

He said Design Plus had a project that, after the bid, the contractor took as much steel out of it as they could. “It saved them a good chunk of change,” he explained. “But if you are too far along, you can lose a lot of money in design fees.”

A problem that was mentioned by some contractors — the reciprocal of the situation that put Havens in bankruptcy — is the business that contractors see from fixed-budget clients.

For example, a school district will receive a bid for a new high school, and then put together a realistic budget and seek out a millage for a new high school filled with new computers. Voters will approve the millage based on those plans, but when construction is to begin, it turns out the rising costs have dramatically changed the cost of materials. That forces some tough decisions and sacrifices have to be made — say with the high school’s technology package — that won the millage approval in the first place.

Cristman has built a solution into its bid process.

“We anticipate the surcharge on the bid,” LaMore said. “And we’ve started using that surcharge as an allowance. And any of that anticipated surcharge that isn’t used is being refunded to the owner. It’s guaranteed maximum pricing.

“If anyone has a better idea, I hope they tell me,” he added.

Despite the higher costs, contractors are emphasizing that construction is still a relative bargain, especially with current interest rates.

“Contractors are still hungry,” Veneklasen said.

“Even though all you hear is that steel prices are up, up, way up — overall, customers are still getting a good buy on the product. Some people will paint that gloom-and-doom picture, but I don’t think it’s true. There is certainly an impact on the price of building, but I don’t think it’s that bad.”

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