Rising fuel prices haven’t hit them directly just yet, but leaders of general construction firms such as Gilbane Building Co. are concerned about the potential impact on the subcontractors and suppliers who make their projects possible.
Hennie Degenaar, preconstruction manager in the San Diego office of Rhode Island-based Gilbane, said recent spikes in crude oil prices — which hit $110 a barrel in April, the highest since 2008 — are squeezing subcontractors and suppliers who were already dealing with rising costs of materials but keeping project bids low to compete for scarce work.
“The costs are not being passed on right now, but that’s not going to go on for much longer,” Degenaar said.
Last month, the U.S. Department of Labor reported that construction materials prices increased 2 percent in March, the largest monthly increase since July 2008. At the end of the first quarter, costs were 6.9 percent above year-ago levels.
Brace for Impact
Ken Simonson, chief economist for the Associated General Contractors of America, has warned companies that they should for the next few months brace for periods of 6 percent to 8 percent year-over-year increases, even if average price hikes return to 4 percent to 6 percent by year’s end.
According to Reed Construction Data Inc., materials price hikes can be blamed largely on truck freight rates, which accumulate throughout the process of manufacturing and delivering materials and have risen 7 percent to 8 percent in the past year. Those freight hikes have mainly been caused by higher diesel fuel prices.
Degenaar said the situation has increased pressure on subcontractors and suppliers who were already facing spiking costs for materials because of rising global demand. That includes steel, copper and PVC pipes, which are made with petroleum.
Gilbane recently did an informal survey of local subcontractors and found concerns on a few pricing fronts. For instance, San Diego-based California Comfort Systems USA Inc., which plans and installs ventilation systems, saw copper costs increase 43 percent over the last year, according to chief estimator Dan Sackett.
Volatile Steel Market
Jerry McWherter, a vice president in the San Diego sales office of Schuff Steel Co., pointed to “a lot of volatility in the steel market,” with structural steel and rebar costs rising in recent months because of a spike in scrap metal prices.
Degennar said rising fuel and commodity prices affect construction trades ranging from asphalt, concrete and earthwork to plumbing and demolition.
Tim Penick, president of San Diego-based general contractor T.B. Penick & Sons Inc., said subcontractors and suppliers are the first to feel the pinch in nearly every phase of their business, including delivering materials and running heavy equipment at construction sites.
If inflationary trends escalate, some smaller subcontracting firms could go out of business, since they would lose out on new projects or become unable to meet cost requirements on projects they’ve already won. In the long run, that could impact the larger construction contractors and building owners who depend on those specialty firms.
“Construction companies are having a hard time passing on these commodities-related price increases to the market,” Penick said. “There’s a sense that there’s not much more to give.”
Price hikes could upset what has recently been a steady post-recession recovery in San Diego County construction, even though local activity has not returned to pre-recession levels.
According to the Construction Industry Research Board, builders in the first quarter of 2011 took out permits for residential and commercial projects valued at more than $649 million, including new construction, expansions and renovations.
That topped the first quarter of 2010 by 66 percent, and 2009’s first quarter by 81 percent.