By Ross Edwards
Sources of Escalation:
There are four main sources of escalation in a concrete structure: subcontractor markup, labor cost, concrete material, and rebar/pt materials. This document will discuss each area of escalation, its relative percentage cost for the structure, and suggestions on the best ways to mitigate the escalation.
This summary assumes that we are in an improving economy with inflationary pressures and increasing work coming for the construction industry. If we revert to another recession some or all of the escalation currently being forecasted to come into the market may go away.
1. Subcontractor Markup (6%-20% of total cost):
Subcontractor markup varies based on the amount of available work in the market place and the competition for the available work. Each subcontractor has a certain core crew of personnel that make up the life blood of their operation. In the last few years subcontractors have had to constantly reevaluate their core crews and adjust their markups to try and keep their core crews busy. The last few years have severely shrunk the core crews of the concrete subcontractors operating in the Bay Area. Once the core crews have a backlog of work, markups for the remaining work will start to rise. As additional work is added to the backlog the markups can start to dramatically increase.
- A. Mitigation of Markup Escalation:
All indications are that additional work is coming to the Bay Area. This is being seen by a dramatic increase in the number of plans and opportunities that are coming into our office. Time will tell which of the projects are able to get off the ground. The best way for an owner/gc to mitigate escalation in this environment is to get their projects bought out immediately, as the earlier the projects are bought in this cycle the lower the markups will be.
2. Labor Cost ( approx. 35% of total cost):
The escalation for the labor cost comes from increases in the union labor rates and labor increase from productivity estimating forecasts. The current collective bargaining agreement for the Carpenters expires this year on June 30, 2011. A new bargaining agreement is currently being negotiated. As such we are in a period of uncertainty until the new agreement is completed for the carpenters. The productivity forecasts are based on the quality of the workforce available.
- A. Mitigation of Union Labor Rates Increase:
There is no current way to mitigate the increase from union labor except by starting the project as early as possible. The increases hit our books on July 1st of each year. For the last three years the increase has averaged 5%. We are anticipating a similar increase this year.
- B. Mitigation of Estimating Productivity Forecasts:
This item is an estimating item and is based on historical costs of the workers performing the work. As the work gets busier the quality of the available workforce gets spread thinner and lesser quality workers get added to the workforce. Currently, the quality of the workforce is at an all time high and we are estimating historically high production rates. To lock in high production rates which equate to less man hours per unit of work requires committing as early as possible to the work as most people believe that we will be in an ever improving business cycle over the next few years.
3. Concrete Material ( approx. 20% of total cost)
The escalation in concrete material comes from three primary sources: cost of fuel, aggregate cost and cement costs. There is currently pressure on all three areas. For the last three years the price of concrete has been at historic lows when compared with inflation. The entire supply chain is under a great deal of pressure to raise prices.
- A. Mitigation of Concrete Material Costs:
In speaking with one of the major concrete suppliers there is currently no way of mitigating the concrete material escalation without starting the building as soon as possible. The price escalation with respect to the cost of diesel is approximately a $1.00 increase per CY of concrete for every $1.00 increase per gallon of diesel fuel. For example, if the cost of diesel fuel increases from $3.00 per gallon to $5.00 per gallon a yard of concrete will increase by $2/cy. This equates to about $0.10/sf on the cost of the gross sf of the building structure.
For the cost of the aggregate and cement the industry is currently forecasting a 5% increase per year. This increase equates to about $.30/sf for every year the building extends from this year. For example, if half the building is completed in 2012 and half in 2013, the part completed in 2012 would cost $0.30/sf more than today and the part completed in 2013 would cost $0.60/sf for an average increase of $.45/sf over todays costs. The diesel charge would be additive to this increase.
It is possible to buy out the concrete material to a schedule and have the concrete companies take all of the above risk, at time of bid the various options can be explored.
4. Rebar and PT (approx. 35% of total cost)
The escalation from rebar in a concrete building comes from two primary sources, one from the cost of the material and two from the cost of the men installing the work. There are also production and markup costs similar to the one described in the labor cost item 2 above. The hourly cost of the men is controlled by collective bargaining agreements and is a known quantity although the agreement is currently being negotiated so the exact amount of the increases is not known at this time although it is expected to be about 5% per year for the next three years.
The rebar for the projects is all purchased from mills operating in the United States, and the rebar is sold on a $/lb basis. The price/lb of the rebar is published monthly by the various mills. The mills also typically provide some guidance on future price increases. Often times this guidance is self serving in the hope that they can get the increases to stick if they advertise them in advance. The rebar in the United States is made entirely from scrap steel and the price of scrap has a direct bearing on the cost of rebar. There is a worldwide market for scrap so the cost of rebar in the United States is affected by the global demand for scrap or events that prevent scrap from being transported (i.e. the recent flooding in Australia).
- A. Mitigation of Rebar Material Costs:
To mitigate the cost of steel the most effective way that we have used is to pre-purchase the rebar for a given job and store the rebar in an insured warehouse for use once the project has started. The exact details of the project do not need to be complete for this to happen just the rough bar sizes as the bars are purchased in 60 foot lengths. The steel for the job can then either be bought in one lump sum or purchased over time allowing the subcontractor to play the market for when the best time to buy the steel is. In either of these scenarios the contractor is paid for the steel as stored materials. In the scenario of buying the steel upfront or overtime the contractor would take the risk on the full price of the steel. We are currently doing this on one of the high-rises getting ready to be built in San Francisco.
If pre-purchasing the steel is not a viable option then the mill price of the steel at the time of bid can be identified along with the total pounds of steel for the project. When the project is then ready to start and funding is secured the price of the mill steel can be verified and the cost per pound in the contract can be modified by this increase or decrease. There is adequate documentation available in the market place for this to occur.
The last option is to put all the risk on the contractor and have them put in their own escalation for the project. At bid time numbers can be obtained for this scenario and compared with a price for the owner to take the risk on the steel.



